Home >Markets >Mark To Market >Gold loan lenders glitter over yellow metal’s price surge, and borrowings

Gold loan providers have reaped benefits from the surge in the yellow metal’s prices, apart from the emergency borrowings triggered by the covid-19 pandemic.

Both Muthoot Finance Ltd and Manappuram Finance Ltd have shown healthy growth in terms of profitability.

On Friday, Manappuram Finance reported 21% growth in operating profit for the September quarter as margins remained steady and loan growth healthy. The lender has also kept its asset quality steady with gross bad loans forming just 1.11% of its total loan book.

However, the future profitability of gold loan lenders hinges largely on their growth rates. The assets under management (AUM) for Manappuram Finance grew 29.6% in the September quarter for gold loans. But peer Muthoot Finance trumped that with 32% growth—its highest quarterly growth rate in a decade. In essence, Indians are borrowing more by pledging their gold with lenders. Indeed, even banks have been pushing gold loans recently. The more than 30% rise in gold prices in India so far in 2020 is also fuelling this loan growth.

Healthy growth
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Healthy growth

The management commentary has been positive from both lenders. Muthoot Finance expects its loan growth to be 15%, while Manappuram Finance, in a call with analysts, has stood by its earlier guidance of 10-15% growth.

However, the AUM growth will be lower than previous years, a sign that the pandemic has not spared even gold loan providers. Much of the deceleration can be attributed to the first quarter, which was under lockdown following the coronavirus outbreak. Lenders were not able to service loan requests or collect repayments during the time.

Even as more and more Indians take gold loans partly fuelled by the rise in gold prices, the repayments have also risen. That augurs well for both gold loan providers. The collection efficiency for Muthoot Finance and Manappuram Finance reached pre-covid levels in the September quarter.

However, there are some worries ahead. Analysts highlighted that gold prices tend to be volatile and have started cooling off. Even for the September quarter, healthy AUM growth was not accompanied by an increase in gold holdings of lenders.

In other words, the collateral backing the gold loans has come down. Both lenders have, however, assured that their loan-to-value ratios have enough room for such a fall.

Gold loan providers have outperformed other lenders since the pandemic struck. However, Manappuram Finance lagged its larger peer Muthoot Finance. Investors seem to have taken note, as the former’s share price has trailed that of the latter by a wide margin.

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