Markets
Behind Manappuram’s gold auctions, a tale of rising stress
Summary
The lender had to auction ₹1,500 crore worth of gold during Q1, an over threefold jump from the previous quarterGold loan lender Manappuram Finance Ltd’s June quarter showed the pain from the second wave of the pandemic as most metrics showed a worsening trend. Investors were most worried by the sharp 13.3% sequential drop in gold assets under management (AUM) and punished the lender by driving its stock down nearly 7% on Tuesday.
What’s more is that the lender had to auction ₹1,500 crore worth of gold during the June quarter, an over threefold jump from the previous quarter’s ₹404 crore. To put it in context, the lender auctioned just ₹8 crore worth of gold in the first three quarters of FY21. Lenders auction gold when all steps to recover fail or when the loan-to-value ratio increases.
This surge in auctions confirms that the distress in Indian households has indeed worsened in the wake of the pandemic’s second wave. Gold is a popular asset used as a leverage for working capital among those involved in agriculture and allied activities. The second wave hit semi-urban and rural centres more than urban centres, increasing stress here.
That said, Manappuram seems to be worse off when compared with larger peer Muthoot Finance, which didn’t end up auctioning gold much. The management explained that gold was auctioned also to bring down the stress level of the book. Further, Manappuram also faced stiff competition from other lenders in the market, losing some high-value customers to its rivals, the management said. Indeed, banks have seen a sharp surge in gold loans in the June quarter.
The management is hopeful that the AUM would grow 15% in the remaining three quarters of this financial year. “Some of our high-value customers were targeted by other players. We believe that the worst is behind us," said V.P. Nandakumar, Manappuram Finance’s managing director and chief executive officer.
Beyond the gold loan portfolio, the lender managed to grow disbursements, albeit only slightly. The non-gold loan AUM showed 0.9% increase sequentially and 8% growth year-on-year. Within this, loans to small businesses and vehicle loans contracted, while microfinance grew.
Meanwhile, the gold auctions helped the lender contain delinquencies as gross bad loans came in at 2% of the total book, a mild increase from 1.9% in the previous quarter. The lender, however, has a large restructured loan pile that investors would need to watch.
Shares of Manappuram Finance have outperformed peer Muthoot Finance since April with a gain of 24%. Valuations may now come under pressure, reflected in the drop in the stock on Tuesday
