Manappuram Finance’s gold loan auctions surge is a sign of distress in economy
The pandemic’s second wave may have deepened the distress, and Manappuram’s management sounded cautious on its impact on the performance of the gold loan portfolio
PremiumMUMBAI: Manappuram Finance Ltd reported a 5.6% sequential contraction in its gold loan portfolio for the March quarter, sharper than what analysts had estimated because the company ended up auctioning a whopping Rs404 crore worth of gold to recover money.
For the lender, the loan book contraction may be a blip because demand for gold loans is unlikely to come down, especially during a pandemic. The management has said the contraction in the portfolio was largely due to the surge in auction amount. As such, on a year-on-year basis, the lender’s gold loan portfolio showed a growth of 12%.
Analysts believe that for Manappuram Finance, the healthy growth in its non-gold portfolio augurs well. The lender reported a 18% growth in consolidated net profit and a decent sequential performance on micro finance portfolio. “Over the medium term, we expect MGFL to deliver 10-15% steady-state gold loan growth. In the other segments, there is a clear turnaround in terms of growth and collections," wrote analysts at Motilal Oswal Financial Services Ltd in a note.
But a larger question is whether the surge in auctions over and above a jump in gold loans during a pandemic is a sign of deepening distress among Indians. Lenders end up auctioning every quarter but the surge in the amount is a cause for concern. While Manappuram auctioned Rs404 crore during March quarter, it had auctioned only Rs8 crore worth of gold in the first nine months of FY21.
Gold is a popular asset used as leverage for working capital among those involved in agriculture and allied activities. It is also a key asset for leverage used by small businesses for capital investment. Gold also serves the purpose of emergency loans during crisis given that it is the most liquid of physical assets. It is the third usage of gold that is a sign of rising stress, especially during the current pandemic.
The quickening of growth in gold loan portfolios of lenders including large banks such as State Bank of India (SBI) during the pandemic may mean that emergency usage is increasing. Gold loans of banks had grown 81% for FY21. For some lender such as Federal Bank, the gold loan portfolio was the driver of overall loan growth. As such, small businesses are unlikely to indulge in capital investment since the outlook on future revenues is bleak. Ergo, gold loan demand largely consisted for working capital and emergency purposes.
The pandemic’s second wave may have deepened the distress, and Manappuram’s management sounded cautious on its impact on the performance of the gold loan portfolio. What should add to worry is that the lender had to auction gold at even the lowest prices during the quarter. Recall that gold prices had fallen by more than 10% during that period. Even so, to auction the collateral would be the last option. The fact that Manappuram had to use that last option despite collateral value falling sharply is yet another sign of distress among borrowers.
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