Muthoot Finance Sees Rural Lending Boost From RBI's 'Win-Win' Risk Weight Cut

The recent risk weight reduction for bank loans to non-banking finance companies and microfinance institutions by the Reserve Bank of India could be a ‘win-win' situation for the economy, according to George Alexander Muthoot, Managing Director of Muthoot Finance.

The apex bank’s decision will increase the availability of funds for rural lending and augment accessibility to credit instruments. Speaking to NDTV Profit, Muthoot said that the RBI’s move to reduce the risk weight for NBFCs indicates that there's a need to make funding more accessible to the public.

On Feb. 25, RBI slashed the risk weights of bank loans to NBFCs by 25 basis points, depending on the ratings. The decision, which applies in all cases where the existing risk weight for NBFCs is below 100% based on external ratings, comes at a critical time when bank credit to NBFCs has plunged to a new low, raising concerns about the sector’s ability to sustain lending to retail customers.

"The signal being sent is that the public needs to get more and more fund accessibility. So, to get access to funds, banks can do direct lending as well as lending through the NBFCs. Lending through the NBFCs is the last mile," he said.

“It's a win-win for the consumer as well as for the economy because without consumer spending and the economy moving up, the economy of the country also will not grow,” the top executive added.

Muthoot Finance will also benefit from the RBI move as the company depends on banks for about 55% of the overall borrowing, the top executive explained.

"As far as Muthoot Finance is concerned, we have about 55% of our borrowing coming from banks. This will certainly help us in terms of availability," he said.

When asked about the growth demand trend amid the growing market volatility, Alexander Muthoot said the company has seen strong demand over the past three quarters, doubling the projections for the full year.

"Yes—gold loan demand has been increasing. Our growth projection for the year was 15%, and in the last three quarters, we have already crossed 30%. We see strong demand in both rural and urban sectors," he said.

Muthoot Finance recently received RBI's nod to open 115 new branches. According to Alexander Muthoot, the branch addition will help to serve the gold demand in the market more effectively.

"We usually start with about 100-150 branches every year. As a gold-loan NBFC, we need RBI’s permission. Now we have got 115 branches, which will strengthen our presence," he said.

Shares of Muthoot Finance Ltd. were trading 0.52% lower at Rs 2,135.10 apiece on the NSE as of 9:38 a.m., in comparison to the benchmark Nifty 0.36% down at 22,038.80.