Muthoot Finance Ltd
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Muthoot Finance Ltd
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Hi. Very good afternoon to all of you. Welcome to this call. Today, we have with us Mr. George Alexander Muthoot, who is the MD; Mr. Oommen Mammen, who is the CFO; Mr. George Jr., who is the ED; Mr. Eapen Alexander, who is also the ED; Mr. Bijimon, who is the CGM; and Shanthi, who is the DGM.So without wasting any time, I'll hand over the call to George. Sir, you can take us through how the quarter was and some outlook on the business, and then we can have a Q&A session. Thank you, and over to you, sir.
Good evening, and thank you all for this conference. For -- as far as Muthoot Finance is concerned, the consolidated loan assets under management has increased by 19% year-on-year, which today stands at INR 36,497 crores. As far as the standalone net profit is concerned, it has increased by 15% year-on-year from -- it is now at INR 1,460 crores is for the 9 months, 9 months. That is the overall -- in a nutshell, that is what has happened. We have been growing very well in quarter 1 and quarter 2. Quarter 3, as most of you are aware, there was some turbulence in the NBFC market, especially with regard to the bank funding. And because of that, we actually did 2 things. One was that Muthoot Finance, as a policy, we met quite a few bankers, we met quite a few mutual funds who have been funding us very well till then. We met them and we realized that they -- although we told everybody -- we explained to everyone that as far as gold loan companies are concerned, there is no issue for any bad debt or no issue for NPS. NPS or bad debt does not fade future for a gold finance company. The second point was that about liquidity. The liquidity for gold finance companies is very, very good because the average ticket -- average loan tenure is 4 to 5 months only, and this has definitely always helps NBFCs in getting funding from their own book very easily. Although we told this to the banks and these mutual funds, we felt that we needed to demonstrate this. So we have calculatedly started getting back our money or de-growing our book. What we did was we reduced the loan-to-value considerably so that newer loans, which we were giving every day came down. Every day and every month, we have about as to INR 5,000 crores of loans getting closed and money coming in and another INR 5,000 crores going out as new loans. When we did the LTV change, the INR 5,000 crores of disbursements came down and that brought in cash to the company, and we were -- we degrew our book by little more than INR 1,000 crores. So this money was kept with us as buffer. We wanted to demonstrate that we could certainly get money easily from our own loan book, and this we demonstrated. And we had a CP outstanding of around INR 3,000-plus crores in the last -- in quarter 3 starting. By the end of the quarter, we repaid everything. And during the quarter, we also -- the confidence level of the mutual funds definitely increased and our CP outstanding from INR 3,000 crores went up to INR 4,000 crores. And these were not rollovers. These were all new CPs. The earlier ones were redeemed and new CP. So this we had to demonstrate. But then this happened in October and November. By December 16th -- 10th, things started normalizing. So we -- our book started regrowing, not de-growing, regrowing, and we have been able to maybe equalize the Q2 outstanding and Q3 outstanding. That means there was no growth. If this was not there, our AUM would certainly have grown by INR 1,500 crores. So that is the loss of business. But now in January, February, March, we expect this to improve and probably end the year with a overall AUM growth of 15%. Today, we stand about 12% plus or little around 12% growth. By next 3 months, we should see that reaching 15%.So to with the profitability, the profitability, definitely the incremental borrowing cost has gone up everywhere, even the CPs have -- has become little more costlier, the bank funding also became at that costlier. This is going to be reflected in the cost of borrowing. And as a precautionary measure, as I mentioned, we have also increased our lending rates by around 100 bps in the last 2 months. And because of that, our profitability has not been impacted much. So you will see that the profits has been -- year-on-year, the profit is higher, but even on -- from last quarter and this quarter, the profit has been -- we are be able to stabilize the profit. And end of the year, we hope to see that the profit also reaches 15%, just like the AUM growth.So this is -- we are very happy. We are very happy that we were able to demonstrate this to all our lenders, and I'm quite sure, after talking to them later on, I'm sure they have realized and understood the steps we have taken, and we are perfectly getting good support for them. We are also coming out -- as a measure, we are also coming out with a new public issue of nonconvertible debentures, which we hope to open next week. Generally, targeting the -- our retail franchisee because at one point of time, maybe 5 years, 6 years back, Muthoot had a NCD or NCD -- listed and unlisted NCD of around INR 12,000 crores, which had really run down in the last several years, and today, stands at about INR 5,000 crores. So we would think of -- we would want to increase this NCD portfolio. And as a first step, we are coming with an issue of NCD now. Probably after successfully completing this issue, we'll probably think of having new issues in future also to definitely tap the retail customer base who have been our loyal resource customers for the last several decades. They have driven the confidence in Muthoot, and we would like to encash on that. So that's about the future of resource mobilization.The other subsidiaries, as far as the housing finance is concerned, we have actually not grown that book. We have, again, calibrated that growth and disbursements in the subsidiary there. As far as the microfinance is concerned, it has done well. It has got new investor, new capital has also been put into the microfinance. They have done well. They have no issues. I think no issues because even for the -- NBFC issue has not -- it has not affected them at all. Then the other subsidiary, which we just started, that is Muthoot Money, which is doing the vehicle finance business in Telangana, Andhra Pradesh presently, has also done well. They have about INR 120 crores of loan book as of December as of quarter ending, INR 180 crores...
INR 187 crores.
187 crores as of December. And probably, they will end the year with around INR 300 crores of outstanding or the vehicle funds. That's also doing well. The insurance broking also has definitely, done well. They have got good profits. As far as Sri Lanka is concerned, they have got permissions for another 10 branches to do gold loan where we are focusing. And going forward, the gold loan book in Sri Lanka NBFC also should -- the proportion will increase and it will be mainly secured book. But having said that, Sri Lanka is definitely a very small portfolio in Muthoot. Our investments there is only about INR 80 crores...
INR 40 crores.
INR 40 crores of -- we only invested in that company, but still, it's a good one. We have lot of expectations from them and maybe in the next 2, 3 years, we should also be doing well. Otherwise, things are on track, business is on track. And I think things should be looking good going forward. With that, I would end my monologue, and we can take questions from you. Thank you.
[ Operator Instructions] Our first question is from the line of Christine Rowley of the Sloane Robinson.
Thank you very much for the helpful explanation of developments over the last quarter and outlook for the remainder of the current fiscal. I wondered if you might be able to give us some sort of granularity on the year-on-year growth rates that you're experiencing in the gold loan book for the month of December and the month of January, please. We are all aware of the disruption in the money markets in October and November. So it'd be helpful to get a read on the growth that you've been achieving as things have normalized in the last couple of months, please?
December, January has been okay. And as I said earlier, we should end the year with about 15% of overall AUM growth. It'll take gradual steps and gradually, it'll increase. I don't have that December, January exact numbers with me, but things -- I'm sure that's what the track I'm getting, we will reach the 15%.
Okay. Are you feeling very confident on the 15% based on what happened in the last couple of months? Because you were at 15% and then increased to 20% and then have come back to 15%, that's my understanding about your visibility towards the AUM growth for the current fiscal.
Yes. See, unless such researches don't happen, these are what -- we would have reached 20%, certainly, if not for this fiasco which happened last quarter. So even having under -- having company gone through that, we should reach that 15%, reasonably confident in that.
Okay. And then just one second question, and then I'll hop off the line and open up for others. I understand that this -- that the year-on-year growth in the net interest income is not as strong. Could you please explain if there is any base effect that we need to be cognizant of in that previous quarter of -- in Q3 of fiscal '18?
See, no, we have explained by now, in the last quarter also that in FY '18, we were having a higher -- more-than-normal level of collections because of higher over dues and consequently, we were able to collect a higher penal interest. So primarily, that was coming from a 6 months portfolio, which was charging a penal interest immediately after 6 months, so which resulted in a higher collection.Now the benefit of those -- at that time itself, we still had mentioned that benefit of that extraordinary income or extraordinary -- more than normal level of penal interest collection will not be there in the future. The same thing happened in Q2 of current year -- current -- vis-à-vis last year. So vis-à-vis previous year, if you look at the profit levels are similar, that is primarily because of the difference in the collections.
Our next question is from the line of Anand Bhavnani of Unifi Capital.
Sir, my first question is on our average interest expense on average outstanding liabilities, it has gone up in the quarter to 9.3% from 8.73% in Q2. Can you give us a sense of how are we likely to fare in this particular quarter?
See, overall, the interest rate scenario was on an upward trend and the rates were gradually inching up, and the signals which we are getting that rates are likely to go up. We all know that in this midst of manner, in this context -- I mean during this scenario, all those unfortunate events have happened. And after that, there was severe liquidity fear among -- liquidity -- fear of liquidity crisis among the NBFCs, which resulted in all lenders increasing their lending rate.So we also -- and also on the money market instruments like CPs, the rates have significantly gone up. So because of this, the rates have -- our average borrowing cost in Q3 has gone up, and consequently, our borrowing cost has increased to 9.33% from 8.73% in Q2. I think this is the number we should look at going forward because from what we understand from the market is that the situation is likely to continue like this. The rates are going to remain at these levels. And the coming public issue, also we are likely to raise NCDs in similar range. So I think we should see cost of borrowing somewhere around these levels going forward.
Okay. And sir, we see that sequentially, there has been a fall in cost of employees. So can you help us understand the reasons for that?
It might be -- one is because of excess provision made in the previous quarter. And the second thing is that some festival bonus would have paid in the previous quarter. So these 2 resulted in slightly lower amount. I think this is the number, it should revolve around these levels, close to around INR 200 crores.
Sure. And lastly, sir, on Muthoot Money, the vehicles in that region, there, if you can help us understand what's the overall ballpark AUM numbers that you're aiming at for, let's say, FY -- or next 2, 3 years?
Okay. Okay. I think I said earlier that Muthoot Money which is doing the vehicle finance, we expect the AUM to reach INR 300 crores by this year. And from there, we would be targeting around INR 1,000 crores by next year and INR 2,000 crores by year after that.
Okay. And sir, just lastly, with respect to the strategy on Muthoot Money, we started from AP and Telangana, whereas for Muthoot Homefin, we started from Mumbai, we have raised in Mumbai. So if you can help us understand how did we select upon the geography? And what's the rationale there?
No, no. There's not strategy for that, which needs to be explained. We did our homework -- we did the homework and business potential, et cetera. And we zeroed in on Telangana, Andhra Pradesh. And secondly, scope and talent -- scope was there, talent was also there. That was what we decided on.
We'll take the next question from the line of Prateek Agrawal of ASK Investments.
I wanted to understand was that the quarter was progressing, the gold purchase has moved up, so while I understand the business, but yet, in terms of LTVs, the LTV would have now become favorable, so that in the fourth quarter, if the gold prices are where they are and the liquidity situation improves, should we not expect more than a 3% AUM growth that you are indicating?
Yes. This is what we are expecting, if some more comes, we always have our funding to do that and we'll do it, no issue there. If there is more demand, it's not that we are going to restrict our AUM to what I said because growth and potential, we'll definitely be doing. No doubt about it.
Yes. So because of the larger gap in LTV for the same customers, you can probably grow more. Of course, they need the money.
Yes, yes, provided he wants it.
Yes, yes, correct, if he needs the money. Yes, okay. That's it from my side.
We will take our next question from the line of [ Subrata Sarkar ] From [ Mount Infra Finance ].
So a couple of questions, sir. First is that you have made it clear like cost of fund will remain elevated in -- given the current situation, sir. So -- but sir, as you have told like we have increased our like yield, so basically, we have increased our disbursement rate by almost 100 basis point. So in that case, sir, like whether the blended yield will go up? And by that way, like this quarter, we have experienced a contraction in NIM Q-on-Q, so at least some part of that will be restored?
Yes, yes. The rates have -- we increased the rates by 1%. It'll take a little time for it to kick in, maybe 3 months, 4 months for it to kick in or so. Probably, we will be -- we are trying to maintain our spreads. That's what we are trying to do. So for that, whatever required, we will do. We won't be extraordinarily hiking the rate. But it will be definitely based on the cost. So if the cost goes up, we will increase our rate. That's what we've already done. We'll take a call and see, and these are only for fresh loans, you must understand.
Yes, sir, definitely. So in that case, sir, like on a ballpark figure, broad way, the yield spread has bottomed out in this quarter or it will bottom out in next quarter at least? [Foreign Language] Sir, should we expect a downward trend in spread continue in next quarter also or like it will be at this range or like what is the understanding on that, sir?
I think, it should remain at similar levels.
We'll take our next question from the line of Amit Rane of Quantum Securities.
Sir, can you give some idea about the momentum in the disbursement that we have seen compared to October to December period to what we are seeing now? So any trend in that, that you can highlight in terms of disbursements, monthly disbursements, I'm asking?
See, monthly disbursements, the momentum was good in -- first quarter and second quarter, the momentum was good. Third quarter also the momentum was good, but unfortunately because of the crisis, which emerged in the system, external environment, we had cut down on our disbursements. The disbursement numbers continues to be robust once -- from December onwards because by that time, the situation became quite -- almost normal.
Right. And sir, in terms of CP rates, we raised INR 4,000 crore. So what was the peak rate at which we raised during the quarter? And what is the current rate going on?
I think we raised that around 9.75%, that was a maximum we had done. And currently, we are rating at around 7.98% or -- around 7.98%.
We will take our next question from the line of Avinash Jain of [ SGSIC India ].
Could you give us the consolidated net worth maybe in book value per share numbers for ending Q3?
Muthoot Finance, we can give. Otherwise, consolidation we have not done. Muthoot Finance is INR 9,200 crores.
Okay. They're independent, like I requested for the consolidated net worth.
We have not done the consolidated numbers.
Sure. Okay. And secondly, my question was, was there -- so the net disbursement -- net as in -- while it was directed that there'll be a 15% consolidated AUM growth, but is there a net addition in gold loan AUM booked now from December onwards? Because the gold AUM specifically fell by 1%. Obviously, there was a conscious decision to reduce the disbursements because of the repayment and whatever was being tried to achieve, but has that picked up? So is there a net additional gold loan AUM...
What we are talking is mainly about the gold loan business. That has picked up, the gold loan business has picked up, yes. 15% which I said is for the gold loan business, AUM growth.
We'll take our next question from the line of Parag Jariwala of White Oak Capital.
Sir, is it possible for us to say that how much of liquidity we have kept versus our average? Because if I see, we have -- our borrowings have gone up by around INR 900-odd crores when the addition to loan book is around INR 150-odd crores. So basically, I'm trying to work out how much of interest we lost just by keeping the higher liquidity on the balance sheet?
See, we keep liquidity in the form of cash. We have some investments, we have some current account balances. And we also keep some money in liquid funds. These are the liquid -- more than that, what we are trying to communicate is that our loan book itself is a liquid portfolio. And in times of our emergencies, we can liquidate. If you want, we can liquidate, generate cash, almost like INR 5,000 crores on a regular basis, we can generate INR 5,000 crores of liquidity into our books. So we are not much worried about the liquidity, but still we need some amount of liquidity to manage our day-to-day movements, cash.
Okay. But is it possible to quantify or...
No. Probably, it will be slightly difficult to quantify that exact number. So there's a lot of things have happened in the last 3 months.
Okay. And the last thing, in the home finance business also we used to have INR 200 crores-odd of disbursement run rate, which has fallen to INR 100-odd crores. So can you give some indications here as well how the momentum has picked up post-December or probably just from December onwards?
Right. So again, this is even -- for quarter 3, our disbursement was around INR 105 crores. And for quarter 1, quarter 2, we did little more than INR 320 crores. So again, the crisis was -- the epicenter of the crisis was in housing finance, and it was a decision on our part also to tread carefully at this point of time to ensure that our loan -- the disbursement quality is also maintained. That said, now that things have settled down a little bit, we are hoping to do probably about INR 160 crores to INR 180 crores of disbursement for the current quarter, that is quarter 4.
Our next question is from the line of Ashish Kumar of Infinity Alternatives.
Just continuing from the last question regarding the housing finance, if you can give us a little bit of a color if on the housing finance book as how much is mortgages, how much is LAP, and how much is project loans in the business?
So we do only housing loans. We don't have any construction finance exposure. And for the loan against property, we have given up -- we have done a small pilot in a few regions. I think the outstanding loans would be about INR 1 crores to INR 1.5 crores. That's it. So 99.9% of our book is pure home loans.
So hopefully, none of the issues with the project financing book will hit us?
Right. No, no.
The second thing is -- I'm going back to the same question. This question has been asked a couple of times, and I was trying to understand whether the growth momentum on the gold loan business has come back. Can you give us some idea about what's happening on the ground in terms of branch-level activity? Have you seen how the competition is faring? Is it lower? Just to kind of give us some more confidence to us as to what's kind of happening on the ground in terms of the disbursements. And are we past the pain period of October, November?
We have passed the pain period of October, November. We are actually growing our book. Confidence level at the branch level is certainly on its high. As far as competition is concerned, I'm not very sure. They have all come back to normal. But as far as Muthoot finance is concerned, we are back on track. We are ready and waiting for customers to come forward for their gold loans, and we are seeing good uptick in that also. So competition, I'm not very sure. They're back on track. But probably you should not underestimate competition also.
Our next question is from the line of Praful Kumar of Pinpoint Asset Management.
If I understand correctly, your MIS allows you to look at disbursement number on a daily basis. So that's been asked twice or thrice. If you can give us some color on the disbursement trend from, say, November to January, it will be very useful to understand the flow.
I think -- see, already explained. So after the crisis, got resolved some by November end, we are back to normal. So we are seeing regular disbursement as was in the past.
Secondly, on the margins now, if you have increased 100 bps on the incremental lending, so whatever the disbursements happens in Q4, but it's a fair assumption that the margin uptick then only be seen after 3, 4 months when the loan book forms a meaningful part of the overall book?
So we disburse about INR 5,000 crores in a month, so you can make out how much time it'll take. So we have done this in 2 stages: one in October; and another in November end. Even otherwise also the impact will be -- fluctuations will be quite minimal. Here and there, there will be some small variations.
And in terms of LTV, sir, what are the changes you have done? You said, you have some changes on the LTV. So is there any cautious change to bring down the LTV of the book? Or is it something from the banks or mutual funds that they have expressed that the LTV should be -- so what's the strategy there?
So the LTV thing we mentioned, that was in October when the crisis emerged. So we wanted to conserve liquidity. So instead of disbursing INR 5,000 crores, we reduced our disbursed maybe to INR 4,500 crores, but the collections continue to be normal. So we created a liquidity of almost like INR 500 crores. So that is the way we controlled our liquidity part.
Just 2 months. After that, it's back to normal.
Our next question is from the line of Manish Bhandari of Vallum Capital.
Mr. George, my question is regarding the digital mode of distribution of the gold loan, and when I see the competition and your key competitors, they have moved to substantially higher number. And I'm just wondering that where are we on this data point in terms of technological advancement? And can you share that number more regularly on the conference call? And then I'll move to my second question.
See, when we say digital mode, people -- I'm not exactly sure what people mean by saying digital mode, if it is taking money through bank, that's happening. If it is people repaying their loans and interest through bank channels, it is happening. If it is people taking their loans top-ups and the loans on the -- through the mobile apps, yes, it is happening. So these things, everything happens. It takes time. So there's nothing that the competition is doing, and we are not doing. We are doing everything, but the numbers which people gloat as digital business, et cetera, I don't know, I don't know.
I can share that number, that is 38% for your closest competitor. So if you have any numbers to share...
38% of what? 38% of what?
Of the loans disbursed.
Of the loans disbursed, just digitally means what?
Sir, digitally means they have all-digital method of -- through the digital app, through the digital app.
Like what? Digital app.
Yes.
So through digital app they are disbursing the gold loans?
Yes, yes.
Okay, that's happing. Then that's it.
So do we have any number how much our digital footprint would be?
No. We haven't said beyond that. So to our understanding, definitely it is not that way those business are generated. So digital means -- today's environment, digital means sourcing happens through digital mode and the entire, from beginning till end, it happens through digital. We are also doing lot of digital in terms of disbursements. So that we don't count as a pure digital. So for us, sourcing of gold loan business through digital mode is very less. Whether it is -- whether, the competition is talking about that part, then our number is quite less.
Another thing what I noticed is that there's a locker facility started by the competitors in the branches. And I -- intuitively, it looks quite interesting that you can use a free bank locker and deposit your gold there. So at least the -- you are locking in some intuitive way to the customers over a longer period of time. So do you see any merit? And do you see that -- do you -- would you also advance this kind of facility in our business?
People can use the facilities of taking a part of the loan only and being more gold with us. And then afterwards, taking loan -- more loan on the same ornament which is kept there, that is being done. People do it. But I don't know whether this will just keep large amounts of gold in a gold loan company and maybe not take loan now and probably take loan much later. It's a revolving thing. Let us see how many people are doing that because everybody can do more gold and we can keep the gold and they take whenever they want, this all happens. All these things happen in every company.
We'll take our next question from the line of Shubhranshu Mishra of Motilal Oswal Securities.
My first question is with regards to your region-wise AUM, I see a strong growth in the western region. I just want to understand the underlying reason because the rest of the regions haven't grown as much. And if you can also specify what is the cost of acquisition in each region or maybe your key states, that would be very helpful? That's my first question.
Yes. North, West and East, the Hindi-speaking belt definitely has done better than South probably because of the reasons, which is we are -- our penetration in North sector-wise is much lesser than in South. The South is much -- little more competition. And our translation is already very good in South. So South is just today about less than 50% -- almost 50% of the book. But North is 3 big areas, North, East and West, so they have much more potential, and that is what is happening there.
And what is the cost of acquisition in each of the regions, sir, East, West, North and South?
The cost of acquisition, there is no cost acquisition for gold loan companies.
So our branch and staff, it's almost like fixed cost. So variable cost is very negligible.
Okay. And sir, how do we look at the margins going forward? Do we look at -- and what are the cost of the CPs, which have come in? We see a huge spike there.
I think that 3, 4 questions back, we explained all these things about the cost of the CPs, percent costs, earlier costs and also the margins. See, margins will keep -- will be on track. CPs also I think, it has been explained earlier.
Our next question is from the line of Kislay Upadhyay of Abakkus Asset Management.
Sir, congratulations on being able to demonstrate to the banks the liquidity of or gold loan business. My question is on -- sir, I wanted to understand more about Muthoot Money. I see some losses in there. So could you just give action plan? Is it because of branch rollout? And by when can we expect it to make some profits? Hello?
Sir, are you still connected?
Yes, I am.
Hello? Hello? Our AUM presently is INR 180 crores. End of the year, it should end at INR 300 crores. And going forward, next year, we expect it to reach INR 1,000 crores and INR 2,000 crores after that. See, this is a -- the first year, the profits are negative, but it's just 7 months of operations. So probably, we should end the year with no profit, no loss. And going forward, we should have months -- yes, we should have the profits in place next year, starting next year. Monthly, we have reached the monthly breakeven. It's only that the earlier months loss which has been booked has to be wiped off. As far as branch expansion is concerned, we are generally using the branches of Muthoot Finance to start it and probably, hub and spoke, wherever they need disbursals, et cetera, they will have their own branches. So the branches of Muthoot Finance, yes, it is -- there is absolutely no loss due to any write-off, et cetera, that is what we are inching it. No, there's no loss due to any write-off.
Also sir, you mentioned issuing fresh NCDs by next month. By what quantum would it be? And then consequently, what would be the NCD mix in our borrowings?
See, we are about to file the documents, so I'll not be able to share those information. But now, we are likely to continue with this regular issuances, especially focusing on retail investors.
Okay. And any guidance on the mix of NCDs?
So no, retail investors, large amounts don't come overnight, so we need to keep on coming out with frequent issuances. So we have financial prospectus for INR 4,000 crores, will come in different -- various tranches.
Our next question is from the line of Nischint Chawathe of Kotak Securities
Three questions from my side. First is on the outstanding ECL provisions of around INR 583 crores, what would -- what amount of -- what proportion of this is for Stage 3, and I guess, the balance is Stage 1 and 2?
Just give me a second, Nischint. Stage 3 loans is INR 637 crores and ECL provision is INR 583 crores. Overall, ECL provision is 1.8%. And if I remember correct, Stage 3 provision will be about 16 percentage.
Stage 3 ECL is INR 637 crores and your Stage 3 provision is INR 583 crores, right?
Yes. So 16% of that is purely for the Stage 3 provision.
Okay. Okay, got it. The other one was how much options have you done in last quarter, in the last 9 months?
In the last quarter around INR 330 crores.
And 9 months?
9 months, it must be about INR 700 crores.
Okay. And typically -- is it fair to say that typically, in the fourth quarter, you have slightly higher quantum of options?
No. You know probably, this should be lesser at this time. The thing is it is around INR 300 crores only for the fourth quarter also.
Sure. And just finally, one thing was on the other income side, there was a slight increase this quarter. So just -- I think that's what I want to [ point out ].
That might be firmly due to direct investment being done. So we used to keep some amount in liquid funds and all, which would account as income.
And would you have rundown most of it by now? Or would we kind of expect a very similar sort of a quantum next quarter, in the fourth quarter?
See it is -- so I know that number has to be netted off against our finance costs. So if we are doing that, to that extent, the cost of borrowing, the finance cost also will go up. October, when the status emerged, we drawed over -- drew our bank funding and kept that in liquid funds as a liquidity management measure.
Our next question is from the line of Christine Rowley of Sloane Robinson.
I'd like to ask a question about Page 29 in the Investor Relations materials, please, particularly with the focus on the advertising expenses. One of the things that I noticed in the first and second quarter of this year was that the company spent relatively more on advertising. In the first quarter, it was INR 308 million. In the second quarter, it was INR 282 million. And then obviously, in the third quarter when the company took the decision to go a bit slower on growth, the advertising expenses were commensurately reduced to INR 131 million. I wondered if you might be able to give us some insight about your thoughts on advertising expenses into the fourth quarter? Because from what I understand, this business is one where advertising expenditure is important for AUM growth? And obviously, you've invested in new brand ambassadors and other platforms for your advertising. So it might give us an insight into your confidence about full year AUM growth, if we had an understanding about your plans for advertising expenses in the current quarter and then into next year in terms of growth?
So your reading is right because we are using our brand ambassadors. The first 2 quarters, we saw a good growth. So part of this growth is due to the advertisement expenditure we have done. Third quarter, because we saw that the way the crisis was emerging in the environment, we thought we need to lie low and slow down our business. So then in that kind of a scenario, there's no point in spending a large amount on advertisement. So that is the reason why we reduced our advertisement expenditure because we were not sure about generating corresponding business for that expenditure.Now situation has eased, so we are looking at spending slightly more in the current quarter. I think the numbers, which you have seen in Q1 and Q2 should be a regular expenditure, which we should see in future for next year.
Okay. So should we look for 4Q advertising spend to recover back to around INR 300 million as seen in the first and second quarter?
For Q4, I am not sure what extent we are doing it, probably it may not be that much.
Okay. But then coming into next year, it will recover back to the same sort of level consistent with your expanding AUM at 15%?
Right.
Correct?
Yes, yes.
Okay. Can I just ask one other question. I know you provided an answer to another questioner about CP rates. Just to make sure I understand, I heard that correctly, you mentioned that during the course of the quarter, the maximum interest rate that you raised commercial paper at was 9.75%. And then the current CPs, and I appreciate as you kind of roll over, it can change from day to day, but currently, it's around 7.98%. Is that correct?
Yes, that's -- you heard it correct. 9.75% and currently this 7.98%.
Okay. And then obviously, you've now increased your average lending rate by 100 basis points, which is going to sustain into the current quarter and next year based on your current operating conditions. Is that correct?
Yes, that's correct. The only difference is that the CP is a money market instrument because in India a lot of things are -- a lot of new situations are emerging on a daily basis, so the money market instrument prices can very, fluctuate widely in a very short period of time. So I just mentioned that the large deal we have done at 7.98% doesn't mean that future rate will be lower or higher than that.
Okay. And can I just ask, in terms of your term loans, would you be able to provide a similar sort of change during the course of the quarter? What was the maximum rate at which you borrowed from a bank and where it stands at the moment on new facilities that you're negotiating, please?
So a lot of banks have increased their [ loan ] spreads because of the NBFC crisis, which emerged. So some of the banks also increased our lending rate. That is the reason why our cost of borrowing has also gone up from 8.73% in Q2 to 9.3% in third quarter.
Okay. Fine. And has it -- so it has just gone up during the course of the quarter, but it hasn't kind of peaked and then come back down like we saw with CP rates?
Yes. So banks generally don't reduce the rate in a short period of time, whereas the money market instruments, like CPs, the rates can come down overnight.
Okay. I understand that in terms of the competitive position of being able to pass-through these higher rates that one of your large competitors has increased their lending yield on average by about 150 basis points. I wanted to understand the kind of competitive pressure as to whether your customers are absorbing that extra 1% or if you're finding more competition from either public sector banks or other gold lending companies in this space now that you've increased your rates?
As far as other NBFCs are concerned, our rates are always much lower or we have much more -- customers are more comfortable with our lending rates as far as other NBFCs are concerned. But as far as banks are concerned, their rates are much lower. So we are generally seen as one of the more reasonable of the NBFCs. So -- and people definitely know that the interest rates have gone up, so increasing the rates by 1% definitely has not affected our business, neither put away any customers from coming to us, that's for sure. But what about the other competitors, they have raised 100 -- 150 basis points, I am not sure about that.
Our next question is from the line of SivaKumar of Unifi Capital.
Sir, first question was on gearing. Our gearing has come down from INR 3 million to INR 2.74 million at the end of this quarter. So sir, given that you are continuously profitable and the book is growing modestly, what is the limit -- lower limit that you have set? Like how much further would you allow it fall before you start paying out excess capital in form of dividends or buybacks to the shareholders?
For an NBFC to do a buyback, it will be challenging because you need to have a post-buyback leverage not more than 2, which will be difficult. So that is not the objective. Going by how we have done in the first quarter and second quarter, we were gearing up to use this capital for our business growth. Unfortunately, third quarter, things went off the course. So the objective is to use the capital, use the capital for increasing the business. We are also seeing our subsidiaries also doing well. So I think the Board has been -- we have remained as a dividend-paying company. So probably, Board will -- may consider dividend payment for current year also. But other than the dividend, I am not sure. The discussion has been mostly on increasing the business.
Sure, sir. Sir, in that sense, any internal upper or lower limit for capital gearing that you are set at, okay, we won't go below, let's say, INR 2.5 million, INR 2.25 million over the course of...
So no nothing -- nothing, no. That's why I said the discussion has always been revolving around increasing the business.
Yes. And sir, given that now you're focusing on CPs, and recently one of the NBFCs sold their CP book. So is there thought process among our management to use inorganic route to acquire loan portfolio then grow the book? And if you can help us understand any thoughts being considered in that direction.
There's no such consideration as of present about purchasing somebody else's books. As of now, we don't have any such consideration to step [ forward as such ].
Okay. And sir, in our gold book, I think the -- a lot of gold shops and gold jewelry dealers also frequently raise money by mortgaging their jewels with us. So can you give us a sense of how much of our gold book is B2B versus B2C?
So I don't think there's any B2B and gold jewelers if they are planning -- wanting to keep their jewelry with Muthoot, what will they keep in their showroom then? They won't have anything to keep in their showroom. So what they can give is some gold biscuits or bullion, which they have, which Muthoot -- we don't take. So we have never seen big jewelers, et cetera, coming to us for gold on that. We don't do that. So we are not built like that. And it doesn't make common sense for a jeweler to keep his ornaments in Muthoot because then what will he show...
But, sir, I thought more for liquidity reasons? The way a common man approaches is for liquidity reasons. So we don't have any of significant...
We don't take bullion. We take only ornaments. I don't know who has such a lot of ornaments to spare in more than what they need in their showroom unless they are closing their shop. Anyway, as all said and done, we don't see such things.
Our next question is from the line of Anand Bhavnani of Unifi Capital.
Questions answered.Thank you. Ladies and gentlemen, that was the last question. I now hand the floor back to Mr. Digant Haria for closing comments. Over to you, sir.
Yes. Sir, if you can just summarize the growth rates because I think there are a lot of growth rates mentioned? Maybe you can just talk about the gold AUM growth guidance for '19 and the overall guidance? And then closing comments on that.
So Digant, so what MD sir has said is that though we -- Q3 was a total washout, still we'll try to achieve a full year growth of 15 percentage. In FY '20 also the minimum target we are looking at is around 15%, if not more. So that number, we will revise as we progress maybe after 2 quarters in FY '20.
Gold loan.
On gold loan. So the -- other businesses, the plan was to have about 15% of overall group AUM by FY '19, but those numbers, we are not sure how far we'll be able to raise that number. But FY '20, certainly, we should try to look at 20% of the -- nongold business should contribute about 20 percentage and subsequently 25%. So probably in the next 2 years, we should have nongold portfolio of about 25% of the overall AUM.
Okay, okay. All right, thank you. And sir, any closing comments? Otherwise, we can close the call.
So it's fine. We are all -- thank you. Thank you, Digant.
Thank you. Thank you. Thank you, everyone.
Thank you. Ladies and gentlemen...