However rating agency said that it would monitor the financial performance of the gold loan company closely as complete impact of the under recoveries and increased market risk on its financial flexibility and earnings would be evident only in short to medium term.
Manappuram Finance on Tuesday had announced it is likely to book a loss of Rs 50 crore in the fourth quarter due to expected under recovery in delinquent gold loans portfolio due to fall in gold prices. The part of this portfolio was booked at higher loan to value (LTV) ratio of 80-85% before Reserve Bank of India restricted LTV for gold loan companies at 60%.
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Apart from falling gold prices ICRA said that bullet nature of repayments of the gold loans. In most Gold loans, delinquencies are known only at the end of 12-15 months and therefore there could be overbooking of income in the initial phase of a loan or a lag in income reversal.
Rating agency said it had expected some deterioration in asset quality on account of lower refinancing capacity but the quantum of delinquencies is higher than its expectations.
ICRA said it came on the conclusion of adequate capital cover after it conducted sensitivity analysis on the portfolio at risk of the company based on its portfolio LTV mix as on March 20, 2013.
ICRA expects Manappuram’s earning to get impacted in the short term as it starts reversing income on the delinquent and providing for under recoveries on auctioned accounts. Company’s ability to reduce pressure on earnings will depend on timely auction of collaterals, mobilizing funds at lower rate of interest and increasing scale of its operations would be critical for its earnings.
K U B Rao committee appointed by RBI had expressed its apprehensions on fast face of expansion of gold loan companies in last few years.
ICRA would closely monitor earnings of the company in the short term as it auctions large quantities of gold and ability of the company to conclude the auctioning of such a large quantum of ornaments without leading to regulatory interventions or customer backlash is also credit sensitivity.
Rating agency further said that it would also closely be monitoring the impact of the above events on the financial flexibility of the company. In case if banks restrict the access to unused Rs 1850 crore of funding to the company or hold back on fresh credit sanctions, its credit profile could be adversely affected ICRA warned.