In one of those television ads, crafted by creative agency Mudra Communications, a Hindi-speaking man was seen wanting to open a shop. He needed financing. His wife promptly suggested unlocking the potential hidden in their gold ornaments. The man reluctantly pledged the gold to Muthoot, eventually embarking on a successful entrepreneurial journey.

20 years ago, it was difficult for most Indians, particularly those working in the informal sector, to get a business loan from banks. They didn’t have the documentation of income that banks wanted. Gold loans were an option—like the ad conveyed, these are loans given against gold ornaments. While Indians love and hoard a lot of gold jewellery, such loans were not really in vogue in many parts of the country.

Muthoot Finance, a non-banking financial company (NBFC), wanted to change the paradigm. While the company was a familiar name in the south, people in the north struggled to pronounce the name, often calling it ‘Mud-koot’. The idea behind the ads, therefore, was to nudge people beyond south India to take gold loans.

The bet paid off. The advertising blitz popularized gold loans in every part of India, helping Muthoot Finance grow at a lively pace. The company now has 4,742 branches across the country, 41% of them in the north, the west and eastern India. As a percentage of its gold loan portfolio, these regions accounted for 35% of the company’s geographical spread a decade back. By the end of the June quarter this year, they accounted for 52%; the south made up the rest.

Muthoot Finance, today, is India’s largest gold loan NBFC with gold loans under management totalling ₹66,039 crore by the end of June. The company oversees more gold than the central gold reserves of several countries. The gold jewellery kept as security with Muthoot Finance (182 tonnes) is higher than the reserves of Pakistan (64.66 tonnes), the United Arab Emirates (74.49 tonnes), Australia (79.85 tonnes), South Korea (104.45 tonnes) and Sweden (125.72 tonnes), data from the World Gold Council, an industry trade group, shows.

As the company grew bigger, the owners got richer. The promoter and promoter group owns over 73% of the company. It has a market cap of over ₹50,000 crore and is today the wealthiest listed business from Kerala. And by the time MG George Muthoot, part of the promoter family, died in 2021, he had become a billionaire.

The company’s golden run started facing headwinds over a year back. The gold loan market is getting busier with formidable competition from well-heeled contenders—there are public and private sector banks, other NBFCs, and contemporary lending entities. This rivalry has taken a toll on its performance. In terms of the number of active customers, the needle didn’t move much between March 2022 (5,316,246) and March 2023 (5,323,362). Besides, the company is facing higher cost of funds, margin pressures, and a deterioration in asset quality.

There is an imperative for Muthoot Finance to diversify beyond gold. While it wants to, the question is if it can pivot fast enough.

But first, let’s dive into the promoter family’s centuries old history and how it became the gold standard for gold loans.

Timber to chit fund

Over eight centuries ago, ancestors of the Muthoot family—Syrian Christian businessmen— established themselves in a plot called Muthoot in Kozhencherry, a small Kerala town 100 km south of Kochi.

Some of them started trading in timber and gained popularity because of their opulent lifestyle. Besides land, they owned Arabian horses and elephants. An 11th generation (19th century) family member, Mathai Kathanar I, for instance, commanded remarkable attention wherever he journeyed. He used a boat that needed a crew of 28 oarsmen due to its colossal size, according to an account by Mamman Mappillai, the former editor of the Malayalam-language daily, Malayala Manorama.

The origins of Muthoot Finance were in a chit fund venture that also did gold loans on the side, mainly in Kozhencherry. M. George (1911-1993) inherited much of the financial services business and is recognized as the founder-chairman of the Muthoot group.

George had seven children, six sons and a daughter. All men in the family were named after George to forward his legacy, a practice passed down to their progenies, too. Eventually, four Muthoot brothers—MG George Muthoot; George Jacob Muthoot; George Alexander Muthoot and George Thomas Muthoot—led the company’s evolution to the giant that it is today.

George Jacob Muthoot is the current group chairman; George Alexander Muthoot is the managing director while George Thomas Muthoot is the joint managing director.

Before 1997, the company was known as Muthoot Bankers. The Reserve Bank of India, India’s central bank, then wanted the word ‘bank’ dropped from the name so that people don’t confuse the company with a bank. Muthoot Finance Pvt Ltd was thereby incorporated in 1997 and registered as an NBFC. In 2011, the company’s public listing was a super hit—the IPO was oversubscribed 24 times.

How to avoid heists

How did Muthoot Finance establish itself as the largest gold loan NBFC? This wasn’t easy and the company’s current management thinks it won’t be easy for its rivals either. Here’s why:

Ensuring the security of all the gold it oversees is a formidable challenge. Then, there are intricacies involved in assessing the purity of the metal and its value. Customer trust is yet another important facet of the operations.

Muthoot lost a lot of money before it could make some. Its branches were subject to at least 10 major heists over the years.

“Earlier, they (burglars) used to come, break open the strong room, and take the gold,” said George Alexander Muthoot, the managing director. Next, they found an even easier way—they came in a group with guns. “They asked for the key at gunpoint. And in half an hour, disappeared with the gold. This was mainly in north India,” he added.

Of course, the company was insured. But payouts would take years. In the meantime, the company had to pay for the losses from its account. This saved the brand’s reputation.

Such setbacks necessitated investments in multi-layered security measures, said Alexander. Today, Muthoot Finance has one time password (OTP)-controlled locks for operating the vaults, besides CCTV-monitoring from the headquarters.

“Altogether, there are eight layers of security now. It is all custom-made because there was nothing in the market,” Alexander said.

Muthoot Finance also deploys a 1,100-member audit team to ensure real-time accountability. The audit team visits the branches to ensure compliance to regulations, verify accounts and inventory.

“Entry of banks have increased the respectability of the business as a whole,” acknowledged Alexander. “But this is such a focussed business… I am not sure banks will have much success.”

Big banks arrive

Public sector banks think otherwise and fancy their chances in the gold loan market. Their gold loan portfolios are rising exponentially, especially in the agriculture gold loan category. If you do a Google search for ‘agriculture gold loans’, the first four listings are all public lenders—State Bank of India (SBI), Union Bank of India, Bank of Baroda and Indian Bank.

Agriculture gold loans are subsidized farm-related loans secured by gold for farmers with Kisan Credit Cards. It offers farmers concessional crop loans of up to ₹3 lakh at 7% interest. It also provides a 3% interest subvention for quick repayment within a year after advance. Effectively, the plan implies that a farmer can potentially get a short-term crop loan at 4% interest per year.

Nonetheless, NBFCs like Muthoot miss out on this scheme—only public sector banks, private sector banks, cooperative banks and regional rural banks can use the scheme.

SBI, India’s largest bank, saw its agriculture gold loan portfolio rising to ₹83,000 crore in 2022-23, from ₹73,600 crore the year before. The size of this portfolio is now three times its retail gold loan portfolio of ₹28,705 crore as of March. Just in Kerala, Muthoot’s home turf, SBI financed gold loans worth over ₹1,000 crore last year, and is aiming to finance ₹1,700 crore this year, said a banker who did not want to be named.

For Muthoot Finance’s executives, the writing on the wall is clear. India’s financial system is becoming more inclusive; jobs in the formal sector are rising. Traditional banks, therefore, have more comfort in giving loans against gold jewellery. Many banks have deeper coffers and can offer lower interest rates. That’s a serious threat.

Meanwhile, like we mentioned earlier, the NBFC is facing other headwinds. A rise in the cost of funds—the cost incurred in sourcing the cash to lend—is one of them. This could translate to higher interest rates for customers, potentially keeping them away from taking loans. Last year, the overall borrowing cost for Muthoot Finance, in the form of bank lending or non-convertible debentures, rose by about 100 basis points, Alexander said.

In the June quarter this year, Muthoot Finance’s net interest margin (NIM) declined by nearly 70 basis points sequentially to 11.58% on lower yields on advances.

“In the gold loan segment, while the FY24 guidance seems achievable, the threat of competition is not fully out of the way, especially in the low-ticket bucket. So, investors need to brace for some more NIM compression,” an analyst who didn’t want to be identified told Mint on 14 August.

For 2023-24, the company has guided to a growth of 10-15% in its gold loan assets under management.

A house to build

Muthoot Finance believes there is enough headroom to grow in gold still. “We would like to tap the gold loan to the fullest extent possible. There are around 28,000 tonnes of gold in the country. Only 182 tonnes are with us,” Alexander said.

And yet, diversification is the need of the hour, given the onslaught from banks. The company now has a small portfolio in housing loans and vehicle financing.

To help the NBFC stay relevant in the future, it has engaged Mckinsey & Co., a global consulting firm, to study the business and ready it for the future, Alexander informed.

“We started housing loans (in 2018) but then, the pandemic struck two years after. So, we went slow,” said Alexander. “Now, this business is picking up.”

Muthoot Homefin (India), the housing finance subsidiary of Muthoot Finance, appointed a chief executive officer, Alok Aggarwal, in January this year. Aggarwal, an experienced housing finance professional, has been tasked with expanding Muthoot’s business, particularly in tier II and tier III cities.

“We also started small business loans for customers who have purchased a gold loan with us,” Alexander added.

In short, the plan is to have “a healthy mix” of loans, beyond the stronghold of gold.

What works for the company is the harmony between family members. The three brothers and their children collaborate through regular meetings. “Every month, we have a family board meeting. All the family members converge in one place,” said Alexander.

The family follows a Syrian Christian tradition—only the male members are involved in the business; the women get their shareholding.

Alexander stressed that the company’s reliance on the family isn’t an obstacle. Its board today has seven directors from the family and seven independent ones. “Even if there is a death in the family, or even if someone is taking a holiday, it won’t stop us in our tracks because of the corporate structure,” Alexander said.