Holding excess liquidity is Muthoot Finance’s conscious decision

By CL Jose

Downplaying Spread target to 10 pc

KOCHI/June 01-2022: Many may have wondered why Muthoot Finance, the largest gold loan company, carries a larger-than-required liquidity on its balance sheet, leading to a ‘negative carry’.

And the liquidity, in the form of cash and cash equivalents, have been growing steadily in the past couple of years in relation to its borrowings, which have also been piling up.

Muthoot Finance achieved a consolidated profit after tax of Rs4031crore for FY 2022.

“As the economy is gradually recovering, the demand for gold loans has been steady and we remain optimistic for the coming financial year,” said George Jacob Muthoot, Chairman of Muthoot Finance.

Talking to the analysts recently on Muthoot’s (Finance) financial results of FY22, George Alexander (seen in the picture), the managing director of the company, said, “We know we carry a large liquidity in our book, which obviously comes at a cost, but the regulators and rating agencies, especially foreign agencies, are keen to see the liquidity way more than what is required,” he said.

In gold loan business, the collarerals being gold itself, there doesnt arise the question of  liquidity at all. But despite this, these companies are ‘required’ to maintain high liquidity in thier books.

And being in the business, any company would love to be in the good books of regulators and rating agencies.

“We being NBFCs, do not get funding  support from regulators. We have to fall back onb the financial institutions.” the MD said. Alexander also said that the IL&FS and DHFL crises have literally shattered the trust these lenders had been reposing in NBFCs as a segment.

For Muthoot, the borrowings at Rs40,855 crore account for more than 53 per cent of its liabilities and equity as of March 31, 2022.
A close analysis of the liquidity (amount of cash & cash equivalents in relation to its borrowings) shows that the ratio has been steadily rising.

And more worrying is that the price the company is required to pay to maintain a higher liquidity has increased and will rise further as RBI is set to hike the policy rate in the next meeting too.

George Alexander said, “Since we are witnessing signs of recovery in the economy, the RBI rate hike may not dampen overall demand scenario and we are expecting borrowing cost to go up gradually during the year.”

During 2019-20, while the borrowings were to the tune of Rs30,011.5 crore, the cash & cash equivalents were at Rs5834.8 crore, accounting for just 19.44 per cent of its borrowings.

Coming to 20-21 or FY21, the ratio has further risen to 22.16 per cent and when the financial year 2021-22 (FY22) closed, the ratio has further gone up to 24.56 per cent as the cash and cash equivalents topped Rs10,000 crore.

Why downplay spread?

Curiously, the company seemed keen to downplay its spread. To a query as to what kind of spread   the company looks to earn, the MD said he would be fine if he could achieve a spread of 10 per cent.

An analyst expressed surprise as to why he should settle at 10 per cent, despite the company having been earning above 13 per cent spread historically.

In the past four years, the spread has always stayed above 13.4 per cent barring FY22 when it had dropped to 12 per cent.

“Anything above 10 per cent is reasonable and it’s good,” the MD noted tersely.

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