The gold lending business became attractive for investors a few years ago. Being backed by an asset like gold, the market perceived it to be low on risk. This was a valid argument in the times when gold prices were rising. Last year, gold spiked sharply when analysts started questioning the dollar’s status as the world’s reserve currency.
Come 2012, the world looks a much better place and gold prices have seen some correction. The outlook, too, does not seem as bullish as before. Given that the value of the asset against which gold finance companies lend could be at risk, the Reserve Bank of India (RBI) has stepped in. Its recent norms stipulate that non-banking finance companies (NBFCs) cannot exceed a loan-to-value (LTV) ratio of 60 per cent for loans against gold. Also, they will have to maintain a minimum Tier-I capital of 12 per cent by April 2014.
A day after RBI’s notification, shares of Manappuram Finance and Muthoot Finance fell 19 per cent and 10 per cent, respectively. Explains Anand Shanbhag, head of research at Avendus Securities: “While the stipulation on capital adequacy ratio is not worrisome, next year’s earnings estimates would be revised. Growth will be impacted and that would be visible over the next few quarters. However, the survival of these companies is not at risk and the impact of this event may not get extended.”
| VITAL STATS | ||
| Manappuram Finance | Muthoot Finance | |
| Gold stock (tonnes) | 70 | 132 |
| Assets under management (cr) | Rs 12,350 | Rs 22,690 |
| LTV ratio (%) | 70 | less than 60 |
| Tier-I capital (%) | 18 | 13 |
| Branches | 2,738 | 11-Jul |
| Net interest margin (%) | 15 (average) | 10-Sep |
| Source: EMKAY GLOBAL/Companies | ||
According to analysts, going by the additions in new branches and the stock of gold, the balance sheets may not grow as rapidly as in the past. On the basis of December quarter numbers, Emkay Global believes RBI’s stipulation on LTV or capital adequacy would not have a material impact on the companies in the immediate quarter. Muthoot has stated its current LTV is under 60 per cent.
Its net non-performing loans, as of December, stood at 0.25 per cent. In Manappuram’s case, while the net NPA is at 0.2 per cent, LTV is 70 per cent, which would have to be brought down to under 60 per cent. Experts say RBI has done this is to protect the retail lenders to these companies. If the LTV ratio is higher than 60 per cent and borrowers default in case of falling gold prices, bad loans could rise.
In a scenario where gold was rising, this was not such a big issue as the value of the asset was increasing. But, in case of a price reversal, the value of the asset will fall and borrowers may not want to repay to retrieve the asset. The other big regulatory overhang for these stocks is the potential of a margin cap. If this happens, profitability may be affected.