The Reserve Bank of India’s (RBI’s) plan to clamp down on the unbridled expansion in gold loans has succeeded. That much can be seen from the September quarter earnings of Muthoot Finance Ltd and Manappuram Finance Ltd. While the management of these companies exude optimism about growth in the rest of the fiscal, risks remain as yet another RBI committee studies this industry.
In February, RBI declared that companies that lend against gold jewellery should cap their advances at 60% of the value of the metal. Since then, the amount of gold pledged has tumbled. Muthoot’s gold stock has slipped 7.3% since the end of March to 137 tonnes while Manappuram’s has fallen 11.5% to 58 tonnes.
Thus, although the price of gold has risen in this period, gold assets under management (AUM) for these two firms have also been hit. In the six months ended September, Muthoot’s gold AUM has declined 4% and Manappuram’s by 7.4%.
A corollary to this falling demand has been a decline in yields. Thus, despite a fall in the cost of funds, net interest income was under pressure.
For Manappuram, net interest margins declined by 2.5 percentage points during the quarter. That led to a 13.6% drop in its net interest income for the September quarter from a year ago, and consequently, net profit fell by one-fifth.
Muthoot was relatively unscathed since its products were priced lower compared with Manappuram in the first place. Still, its interest income grew only 19% compared with a 24% increase in interest expenses in the September quarter. Thus, a 35% cutback in administrative and other expenses was one of the key reasons why it was able to post a one-fourth increase in net profit.
Asset quality is also under pressure. Net non-performing assets as a proportion of the loan book has increased by 50-70 basis points over the last six months. To be sure, losses will be capped because they hold gold as collateral, but it does point to stress on the business. One basis point is one-hundredth of a percentage point.
The outlook remains muted and growth is now being price-led to a large extent, says Emkay Global Financial Services Ltd. True, some recommendations of the KUB Rao committee on lending against gold may allow these companies to borrow easily from mutual funds, insurance and even raise money via certificate of deposits. However, note that the same panel wants to allow commercial banks to lend against gold other than jewellery such as bars or bullion which will increase competition. These stocks’ underperformance to the broader market sums up the story.