Growing balance sheet may not be easy for gold loan companies

Stocks of Muthoot Finance (Muthoot) and Manappuram Finance (Manappuram) are down 10-12 per cent in the past one month. Besides overall volatility in the market, lower gold prices and rising competition impacted investor sentiment. These factors may keep a check on stock prices, unless these firms allay market fears with better numbers.


“Other companies and banks have also got into gold loan business. Firms such as Muthoot and Manappuram face competition from micro-finance institutions, which offer loans to rural and semi-urban areas,” said G Chokkalingam, founder & MD of Equinomics Research & Advisory.


Though Muthoot and Manappuram are strong players in gold loan business, stiff competition would restrict their earnings, fear analysts. “We believe competition in the gold loan financing is bound to become intense in the next few years, posing a risk to net interest margins (NIMs) enjoyed by specialised gold loan financiers,” Edelweiss Securities said.

Already, growth in their gold-loans halved in FY18 over the previous year. Gold-loan order book of Muthoot came down to 6 per cent in FY18 from 12 per cent in FY17, and Manappuram’s declined to 5 per cent from 10 per cent. Although these firms are aiming to increase the share of non-gold loans such as housing and micro-finance, their competence will be tested given established players in the  segments.


Payal Pandya, an analyst at Centrum Wealth Research, warns, “Lately the gold loan firms are looking to expand in non-gold businesses such as affordable housing and SME lending. These sectors have their own headwinds and may result in higher NPAs due to the assets’ risky nature .” So, it would be interesting to see how credit costs move ahead.


The small base means their non-gold loans may rise faster, supporting overall loan-book growth, which would be driven by expected 10-15 per cent increase in gold-loans. A revival in the rural economy also augers well.


Also, a rise in interest rates and higher bond yields will weigh on margins, as bank loans and debentures accounted for over 70 per cent of their borrowing mix. Although analysts expect companies to pass on high cost-of-funds to consumers, the jury is out on this.

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