Muthoot Finance, a gold loan company is once again coming up with a Non Convertible Debenture (NCDs) offer to raise Rs 150 crores from the public.
Interest Rates On Muthoot Finance NCD April 2015 Issue
| Tenure | Interest payment | Interest rate | Maturity Value in Rs |
| 24 Months | Monthly | 10.25% | 1000 |
| 36 Months | Monthly | 10.25% | 1000 |
| 60 Months | Monthly | 10.25% | 1000 |
| 400 days | Cumulative | 9.75% | 1108 |
| 78 Months | Cumulative | 10.80% | 2000 |
Now as can be seen from the table the NCDs of Muthoot Finance offer an interest rate of up to 10.80 per cent. If you go with cumulative deposits of banks and compare them with the interest rate of select banks, it is significantly higher.
How Leading Bank Interest Rates Compare
| 2 Years | 3 Years | 5 Years | 7 Years | |
| State Bank of India | 8.75% | 8.50% | 8.25% | 8.25% |
| ICICI Bank | 8.75% | 8.75% | 8.50% | 8.50% |
| PNB | 8.75% | 8.75% | 8.50% | 8.50% |
| Bank of Baroda | 8.75% | 8.75% | 8.75% | 8.50% |
| HDFC Bank | 8.75% | 8.75% | 8.75% | 8.25% |
As can be seen from the above two tables the interest rates on the Muthoot Finance April NCDs are far higher. But, that should not be the sole reason to subscribe. Here are some of the pitfalls and reasons why investors should exercise caution
a) Gold Loan Business Can Be Risky
If gold prices come crashing down be rest assured that gold loan borrowers would default. Gold prices have gone nowhere in the last two years. There is always a big risk with price fluctuation and what happens if the US Federal Reserve hikes interest rates going forward.
b) RBI Changes Gold Loans Regulation
The RBI keeps changing regulations from time to time. For example, if it changes the loan to value ratio it could hit the company's performance. Though that might not be terribly risky for the NCD holders.
c) Not The Best Rating Around
ICRA has given a rating of AA- rating indicating a high degree of safety. This is by no means the best. As indicated there are risks going forward, especially for gold loan companies.
Advantages of the Muthoot Finance NCD
There are certain advantages of the Muthoot Finance NCD. These include the following:
1) Superior interest rates when compared to banks.
2) Listing on the exchanges.
3) No TDS, but interest income is not free from tax and is very much taxable.
2) Listing on the exchanges.
3) No TDS, but interest income is not free from tax and is very much taxable.
A few other salient features
1) Issue opens on March 25 and closes on April 27.
2) Cumulative as well as non cumulative option.
3) To be listed on the BSE.
4) Non Resident Indians cannot invest in the NCDs.
2) Cumulative as well as non cumulative option.
3) To be listed on the BSE.
4) Non Resident Indians cannot invest in the NCDs.
Should You Subscribe To The Muthoot Finance April NCDs?
The interest rate being offered by the Non Convertible Debenture is high. Another advantage is that should interest rates drop you are hedging against falling interest rates. There is an element of risk, as somehow one does not feel comfortable sometimes with gold loan companies. If you do not have an appetite for risk, it's best to avoid the NCDs, though the interest rates are attractive.
