Competition and competitive advantages
Muthoot Finance faces competition from other gold loan NBFCs (Manapurram Finance, Muthoot Fincorp), Banks, and unorganized players.
There is a huge entry barrier in the gold loan business - as a customer is very unlikely to entrust his gold jewelry into the custody of an unknown entity. It requires a lot of trust, that takes decades to build. Muthoot family has been into financing for more than a century - and they have built their business on this huge legacy of trust. It is very difficult to replicate - and it is very unlikely that any of the unorganized players will become a challenger to Muthoot Fin in the next 10 years.
Among the large gold loan NBFCs (Muthoot Finance, Manappuram Finance, Muthoot Fincorp) - Muthoot Finance has the largest branch network, is generally more trusted and better managed (I will get into management quality in a short while).
The large branch network of Muthoot Fin (4200+) is also a competitive advantage - with most of the branches being in semi-urban / semi-rural areas, which are not well networked/serviced by banks. Most banks would find it unprofitable to be present in these areas.
The low cost branch network of Muthoot Fin is another competitive advantage - most branches are located in places with cheaper rentals, are not air conditioned, the employees are paid lesser (as their job responsibilities are far more basic than that of a bank employee). Banks are highly unlikely to be able to match the cost structure. Having a low cost structure is not a luxury, but a necessity for gold financing. Because the loan ticket sizes are low (average loan ticket sizes being less than 50K), the transaction and processing costs would make it unprofitable, unless done in the most cost effective manner possible. This is the reason why hardly any bank focuses on gold loans (except agricultural gold loans - which is a different category, and I will come to that later)…
Another competitive advantage is socio-cultural. Muthoot Fin almost entirely serves lower income folks. A lower income person doesn’t feel comfortable in the air-conditioned branch of a bank. He immediately senses that the bank staff are far more interested in serving the other middle income and upper income customers waiting with him at the branch. He knows that he is not the priority of the bank staff. Muthoot Fin on the other hand solely serves customers like him. So, he is treated with respect and valued at a Muthoot Fin branch.
Another competitive advantage is regulatory. Gold loan NBFCs are allowed to provide bullet loans. A bullet loan is when the principal (and also interest?) can be repaid at the end of the loan tenure. Banks are not allowed to do so - banks strictly have to collect loan repayments as EMIs. The main reason why customers take gold loans is because of need for emergency cash - and they often don’t know when they would be able to repay it. Thus, bullet repayments work best for such customers.
There are also other regulatory advantages in terms of how provisioning should be done, etc. But perhaps not required for this discussion.
Another competitive advantage is the fast processing done by Gold loan NBFCs. Most often banks won’t provide a gold loan to a customer unless he is already a bank customer and the bank has access to his banking transactions data (with which the bank is able to judge if the person can repay the EMIs). Gold loan NBFCs don’t have any such requirements. They typically can close the loan granting process in less than 20 mins.
The only big competitive disadvantage is that banks have access to cheaper funds (due to having low-cost CASA deposits). So, banks are able to give cheaper gold loans (11% - 16% interest rate) vis-a-vis Muthoot Finance (12% - 24% interest rate). In practice, customers who need long-term loans tend to go to banks, while customers who need short-term loans (less than 1 year) go to Gold loan NBFCs. The rationale being that if you are taking a 40K loan for less than a year, then a few extra % of interest rate hardly matters. Gold loan NBFCs also allow early repayment (partially or full) without any penalty, so customers really don’t mind the higher interest rates.