Manappuran Finance - Worth Weighing In Gold
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V P NandaKumar
Executive Chairman, Mannapuram Finance
Manappuram has been among the very first in creating a niche for itself in a rather unorganised and fragmented business of gold financing. Can you quickly take us through its journey so far?
Manappuram Finance Ltd. was incorporated in 1992 and came to the stock market with its IPO in 1995. Initially, we focussed on leasing, hire purchase and general finance. Towards the end of 1996, the CRB scam broke out and the NBFC sector in India was in crisis with the RBI coming down hard on us and funding sources dried up. It was against this background that we decided to get into gold loans in a big way. In hindsight, the move turned out to be a game changer for us.
Providing finance against gold has its own risks. How do you ensure that your risks are kept at a minimal level?
To begin with, at Manappuram, we have been associated with gold loans over many decades and so we have that extra knowledge about the ins and outs of the business that gives us an edge in the risk management area (as compared to more re-cent entrants). The are three major risks, viz. price risk, appraisal risk and custodial risk that are involved in this business. Price risk is omnipresent in all commodity loans.
The other two important operating risks in the gold loan business are the appraisal risk and the custodial risk. The appraisal risk cannot be eliminated hundred per cent, but it can be minimized by following stringent KYC norms.
As for custodial risks, we are fully insured against theft, robbery etc. and our systems and procedures specify “joint custody” of the gold kept in the strong room locker at the branch premises. Moreover, we have a system of regular and periodic physical verification of the pledged gold by area heads/internal auditors.
The average rate of interest charged on loans against gold is anywhere between 12 to 28 per cent or in some cases even higher. Do you think it is a high-risk high-return proposition?
Gold loans can certainly be high in risk if you are not familiar with the nuances of the business and if you are not equipped to handle the major risks involved. At Manappuram, we have been in gold loans for decades and we are conversant with all aspects of this business which help in mitigating risk. We have also invested in our own proprietary software solution which incorporates advanced risk management practices.
As for high returns, they can come about only when you have contained your risks and kept your costs in check. If Manappuram has been generating high returns, it has to do with the quality of our management and it would be a mistake to assume that the gold loan business is intrinsically a “high-risk, high-return” proposition.
Take us through the financials of the company in brief please.
We ended fiscal year 2011 with a PAT of Rs.282.66 crores, an increase of 136% compared to Rs.119.72 crores for FY 2009-10. The growth in profits was driven by the record growth in our AUM which shot up to Rs.7,549 crores, nearly three times higher than the previous year’s level of Rs.2,617 crores. Total gold loan disbursements during the year amounted to Rs.18,057 crores as against Rs.7,123 crores in the previous year. Operating income for the year was Rs.1,178.75 crores compared to Rs.476.96 crores for the previous year recording a growth of 147%. Earnings per share (face value: Rs.2/-) have also increased to Rs.7.61 from Rs.4.09.
Our capital adequacy ratio was maintained at a higher level of 30.26% as against the 15% mandated by RBI. In fact, in FY 2011, we had successfully raised additional capital of Rs.1,000 crores through a Qualified Institutional Placement (QIP) issue.
What does the future look like?
The opportunities in the gold loan sector continue to be vast. Hardly about 10% or so of our privately held gold is monetized and to this day, the gold loan market in India continues to be dominated by the unorganized sector which means there is tremendous scope for all the players in the organized sector.
Where do you see the company in the next 5 – 10 years?
In the next five to ten years, Manappuram will have a much more extensive national presence and importantly, I think we should also make a beginning internationally. We are looking at opportunities in the gulf region and in some neighbouring countries as well.