Indian billionaire family turns India’s gold obsession into a fortune

Gold is having a moment in the sun and the billionaire Muthoot clan of India is reaping the benefits. Muthoot Finance Ltd.’s rise speaks to the growing clout of India’s shadow banking sector, which is helping fuel the country’s economic growth. Gold lending across all firms surged 35% in the 12 months ended in June to 13.4 trillion rupees ($151 billion), by far the fastest growth among consumer loans, according to CRIF High Mark Credit Information Services Pvt. The company’s biggest challenge now is keeping rivals at bay, with gold hovering near a record high. Competition is heating up after Bain Capital agreed to pay about $500 million for an 18% stake in gold lender Manappuram Finance Ltd. Mitsubishi UFJ Financial Group Inc. meanwhile is reportedly in talks to buy 20% of shadow bank Shriram Finance Ltd. for $2.6 billion. Muthoot Finance’s plan to expand its 7,500-plus network of branches by up to 200 a year may not be enough to maintain its dominance as India’s top gold lender.

Last week, analysts peppered Muthoot with questions about how the firm is going to deal with foreign competitors, as well as the local banks that are aggressively expanding their gold-loan portfolios. He shrugged off the queries, saying the overall market is expanding. “There is no need to take any hasty or knee-jerk reactions,” said Muthoot. “The challenges in the operations will catch up with them.”

The practice of using gold as collateral for loans dates back centuries. Long before the Muthoots set up shop, small jewelers would offer cash to help clients get through rough patches. The size of the loan — sometimes as little as $17 — is tied to the jewelry’s worth. Higher gold prices boost their value, which leads to bigger loans — and more interest income for lenders like Muthoot Finance. “We only finance used jewelry,” Muthoot said in an interview from his office in Kochi, the commercial hub of Kerala state at the southern tip of India. “Most of the gold is owned by the family. When they give it as collateral, they’d like to take it back.”