D Arul Selvan, Chief Financial Officer at Cholamandalam Investment & Finance Company Limited, said the company continues to see a positive operating environment and expects the second half of the financial year to remain on track.
Gold loans remain a key area of focus as the company expands its branch network. Cholamandalam Investment & Finance plans to add 300–350 gold loan branches during the current fiscal year, with more than 120 already launched.
Selvan also highlighted the role of technology in controlling fraud risks in the gold loan business, while competition could put some pressure on pricing.
On the regulatory front, the company has a small exposure to revolving-credit products and is awaiting the final RBI guidelines before taking a broader view. The company has also been slowing its supply chain finance business, which it said is not ROA-accretive.
This is the verbatim transcript of the interview.
Q: What are the trends you are observing on the ground, and what are your expectations in terms of a better growth number in the second half of the fiscal?
A: We still maintain our stance that we will continue to grow at 20–23% AUM growth and we are not changing that. Things on the ground are good. Auto is picking up, and a large part of the El Niño threat has also been subdued. Though there are some pockets still of deficiency, in a country like India, there will always be some small pockets where there are deficiencies or surpluses in the monsoon. But everything seems to be on the right path for the second half.
Q: Gold finance is a smaller part of your business, but you’ve been talking about scaling that up. Give us a few details about the break-even point. How long will some of these new branches that you open take to break even, and at what scale do they break even? Also, what is the ultimate guidance in terms of scaling the gold finance book?
A: As we closed March 2023, we had around 119 branches, and the AUM was around ₹1,800 crore. We plan to introduce another 300–350 branches in this fiscal, of which we have already launched more than 120 branches as we speak today. We are progressively expanding, because for gold loans, we set up exclusive branches, and it is not part of our existing branches, unlike other businesses within our portfolio.
As we move on, the new branches will have more OPEX, so this trend will continue. The gold loan business as a whole will take us two to three years to reach break-even. But if you look at it, the existing branches which we launched last year are already at break-even. The new branches will have slightly higher OPEX and costs in the current year. So, these will slightly offset the break-even contribution of the old branches.
So, gold will continue to be in negative territory at a PBT level for another one or two years before the existing or old branches become larger and their contribution becomes more solid.
Q: And you said that the AUM per branch you’re targeting is around ₹12–14 crore?
A: I don’t want to commit to any number right now, but certainly, yes. We will be in line with the industry. We won’t be too far away, but certainly, we will make an effort to make it larger.
Q: Has people costs gone through the roof in the business, Mr. Selvan, specifically in gold? Because there’s an absolute scramble to get people, because everybody is opening up and fast-expanding, right?
A: On gold, yes, we are taking people from existing industry players, but we are also in the process of creating training and development programmes for people, so that we can home-grow people for the future. The first set of branches, of course, had people from the industry, and we will continue to do so for the current year also. By next year, the new sets of branches that come hereafter will start having progressively home-grown people.
Q: As someone who’s been in the business a long time, is the runway long? Risk’s very low. It’s a business where traditionally realised losses have been very negligible, because you have the product at the end of the day. So, what’s your sense?
A: Here the product is with you. There is no worry about the product even being cannibalised or getting depreciated. Mostly, it is an appreciating asset. So, there again, we have a positive.
The only risk is fraudulent or spurious gold coming through the customer or collusion of employees, and fraud at the branch level through the misappropriation of gold, which is stored in the individual branches. But now technology is available to a large extent where you could monitor them from a command centre at a central point, which is what we are doing.
There are multiple options available to track, like RFID packets or RFID tags, which will be able to track the gold loan at every stage, right from its receipt from the customer to its delivery back to them. So, these technology developments help to make this gold business much more secure.
I think it’s a good business that we should focus on. Yes, a lot of competition is coming in. That would create some sort of pricing pressure, but still there is enough PBT, and certainly, for Chola, it will be an ROA-accretive business in the days to come.
Q: The other one, is this RBI circular on revolving credit. Do you have those kinds of products?
A: We do have a very small part of it. I think it’s around 0.6–0.7% of our overall book. We started recently, because most of the other players in the industry had been doing this. We will take a view on it once we get the final guidelines on this from RBI.
Q: That is the 0.6% of the book is basically these flexi personal loan kind of things, right?
A: Exactly, it’s around ₹1,600 crore.
Q: There is also talk and anxiety that maybe other kinds of, like supply chain finance and those kinds of things, may also fall under the ambit of the circular. Have you taken a look at this?
A: Even in supply chain, we had been slowing down, and for different reasons, we had slowed down supply chain. We have articulated that in the earlier calls, etc., because that is not an ROA-accretive product. So, we had been slowing down on that product.
Even, if that gets added into this, though I really doubt that is the regulator’s intent to add supply chain into this. However, if they do so, then also it may not be a large variance for us from an AUM perspective.
Q: Gold doesn’t work like this, right, as a product? I mean, on-tap kind of thing or, in some cases, it does. Typically, it’s designed like a fixed tenure, right?
A: We don’t have a product like that. We don’t have a product which is revolving. In gold, you have to repay, and now the regulator allows the interest to be serviced, and then you can obtain a fresh loan with the latest LTV being factored in.
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