Markets
Gold rush puts the shine on select lenders
Summary
- Rising price of the yellow metal means higher value of collateral for gold lenders and a boost to assets under management.
Gold is shining bright, with its price above ₹80,000 per 10 grams. Rising price of the yellow metal means higher value of collateral for gold lenders and a boost to their assets under management (AUM). In this scenario, Muthoot Finance Ltd is the best placed. Its gold loan AUM surged 34% year-on-year and 8% sequentially in the December quarter (Q3FY25). Higher gold prices and new customer additions led by strategic transformation of Muthoot Money branches for gold loan disbursement helped.
It has maintained its AUM growth guidance for FY25 at 25%—a figure that was revised upwards from 15% in Q2FY25.
In general, to beat cyclicality in the gold lending business, Muthoot and peers are diversifying into non-gold lending segments of microfinance (MFI), vehicle and housing financing. However, Muthoot’s relatively higher exposure to gold lending (gold loan AUM is 84% of consolidated AUM) than rivals augurs well due to tailwinds from higher gold prices, subsiding competition from NBFCs and branch expansions.
“Demand for gold loans will likely continue to hold on well. The slowdown in the microfinance sector makes gold loans a preferred option in the lower end of the market," said analysts from Kotak Institutional Equities in a report on 13 February, adding, “The competitive environment remains benign for now."
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Investors have acknowledged this. Muthoot’s shares hit a new 52-week high of ₹2,334.80 on Thursday, reacting to Q3 results, and have rallied 52% so far in FY25. However, credit cost has been elevated lately and its impact needs to be tracked. Moreover, losses in Belstar Microfinance need to reverse.
For Manappuram Finance Ltd, too, Asirvad Microfinance remains a sore point due to macroeconomic stress in this segment. Recall that RBI revoked the ban on operations of Asirvad MFI in December. “While embargo on the MFI business has been lifted, the alignment of the gold lending business to regulatory requirements, headwinds coupled with operational inefficiency in some aspects of gold and MFI segments continue to play spoilsport. Beside this, the likelihood of a strategic stake sale continues to loom large on valuation," said an Elara Securities (India) report on 14 February.
Manappuram’s gold loan AUM growth in Q3FY25 was comparatively lower at 19% year-on-year. The metric was flat sequentially as the gold loan customer base fell. The management attributed the sluggishness to festive seasonality, but remains confident of an uptick Q4 onwards. Manappuram aims to deliver 15-20% gold loan growth in the foreseeable future versus its earlier guidance of 12-15%. The company is in discussion with the Reserve Bank of India for branch openings.
Manappuram’s non–gold loan business accounted for around 45% of its total AUM in Q3. Manappuram has now titled its growth strategy toward secured lending and reducing the share of unsecured and MFI loans, but execution is the key. For now, Manappuram stock is significantly lagging Muthoot with mere 3% returns so far in FY25.
Meanwhile, post lifting of the ban IIFL Finance Ltd’s gold loan AUM rose sequentially by 39% but fell year-on-year to ₹15,044 crore in Q3FY25. But growth came at the expense of lower yields. IIFL aims to scale up its gold loan AUM to ₹22,000-23,000 crore by March. It is also feeling the heat of exposure to the troubled MFI segment and pain in MSMEs lending has led to higher credit cost. Going ahead, IIFL expects the share of gold loans to improve to nearly 33% from 21%. IIFL is also looking to reduce the share of MFI and unsecured loans. As such, pressure on near-term earnings can stay. IIFL’s shares have dropped 4.84% so far in FY25.
