Kerala gold loan NBFCs tap NCDs to raise funds as banks get stingy

Kerala gold loan NBFCs tap NCDs to raise funds as banks get stingy
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Kochi: Non-banking financial companies (NBFCs) in Kerala, particularly those dealing in gold loans, are overwhelmingly opting for Non-convertible debentures (NCDs) for mobilising funds.

NCDs, which cannot be converted into shares, are used by corporates to raise long-term funds.

In 2020, nine out of the 12 NCD issues in the country are from Kerala. This is the highest percentage of Kerala NBFCs (75%) in India going for NCDs in a year.

This list is till September 30, 2020 and more NCD issues from the state are in the pipeline. Interestingly, eight of the nine NCD issues from the state are by gold loan NBFCs.

So far, Kerala firms have issued NCDs for nearly Rs 1,900 crore this year.

The details of NCD issue of Muthoot Finance, for which the draft was filed with SEBI on September 30, are yet to be finalised, but it is expected to be a mega offer.

The previous highest percentage was in 2014, when 14 NBFCs from Kerala out of a total of 25 (56%) opted for NCDs. The percentage was 52 in 2015.

Last year saw 11 NCDs of Kerala companies out of the 31.

Higher success rate of NCDs is prompting Kerala companies to go for more such offers

"NCDs are being issued mostly by the Kerala-based gold loan NBFCs whose business has been on the upswing even in the midst of the Covid-19 pandemic, mainly to fund the growth in business," says Mathew Muthoottu, MD of Muthoottu Mini Financiers Ltd, which already had two NCD issues in 2020. It has also started preparations for another NCD issue.

With banks offering low interest rates for fixed deposits, people are constantly weighing other options for investment.

In the process, they often end up depositing money in unscrupulous companies.

The case of Popular Finance, which duped public off Rs 2,000 crore, is the most recent example. At present, the RBI permits only four NBFCs from the state to collect deposits from the public

"NCDs may not be 100% risk-free, but are much better than the "blade companies” that fleece people. The NCDs issued by NBFCs that have good credit rating follow the strict norms of SEBI and offer attractive interest rates to beat inflation," says Benzi Thomas, founder president of Kerala chapter of Association of Independent Financial Advisors Association.

The NCDs have provided the NBFCs a safe instrument to garner funds for their expansion activities at a time when loans from banks have dried up.

For most NBFCs the lockdown period was a real bummer, but for those dealing with gold loans it provided a great opportunity in times of adversity as people pledged gold to tide over financial difficulties.

Soaring gold prices proved to be a windfall for the gold loan NBFCs. "It made gold more productive benefiting the gold loan companies. Gold loan NBFCs were the only ones lending while others struggled with loss. Our portfolio doubled in the last six months," says Josekutty Xavier, whole time director of KLM Axiva Finvest Ltd., which is one of the gold loan companies to tap the market for NCDs this year.

According to Thomas John Muthoot, chairman of Muthoot Pappachan group, NCD issues are an important part of its diversified fund-raising programme and helps to reinforce the trust and goodwill of the retail customers. "The retail customers have stood with us for generations. The parents and their children have reposed faith in us. We are sure they will not let us down even if banks may leave us high and dry," he notes.

Its gold loan company Muthoot Fincorp recently hit the market with a Rs 400 crore NCD issue.

"NCDs issued by the gold loan companies in Kerala offer good rates of interest and are also rated instruments with good market acceptability. Each Issuing company has its niche loyal customers banking on the goodwill and repayment track record of the company. This makes issuance of NCDs a better choice to raise funds when the banks are stingy with lending to NBFCs," Mathew Mothoottu shares a similar sentiment.

NCD issues are primarily driven by the market’s appetite for such issues, says V P Nandakumar,MD and CEO of Manappuram Finance Company. "As the gold loan NBFCs are considered safe in the current challenging environment (with credit risk perceived as low), we are able to raise long term funds at a lower cost. It is sensible to have a diversified source of funds to minimise the chances of asset-liability mismatches. Of course, as an NBFC focused predominantly on gold loans – which are short term in nature-- the risk of an asset-liability mismatch is much less for us," he explains.

With SEBI imposing strict norms, NCDs have become a safe option for the investors. "It is as good as public issue of shares as we have to follow all norms including rating. And in Demat form it helps to avoid tax deduction at source (TDS)," John Muthoot said.

Most of the NCDs offer attractive interest rates ranging from 7-9% that are much better than rates offered by the banks for fixed deposits. Safety and higher interest rates are not the only criteria to judge them.

"The NCDs, which are listed, make a better alternative to deposits as the liquidity of funds is intact even while earning a good return on the investment. Listed NCDs are rated instruments that are marketable. They come under the purview of SEBI, which has strict compliance regulations ensuring that the investment of the customer is safe. The coupon rates are fixed and the promised amount will be paid as interest/maturity proceeds irrespective of the financial market volatility," says Mathew Muthoottu.

These aspects are echoed by Nandakumar too. "NCDs offer higher yield and that explains why smart investors prefer to invest in NCDs. Also, for institutional investors, NCDs are a better investment product from the taxation perspective," he says.

(P K Krishnakumar is an independent journalist based in Kochi.)

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