 "Manappuram's bad loans thesis fails to convince")
On the face of it, the business of lending against gold should be considered a low-risk one. But Manappuram Gold Finance claims that the five per cent fall in gold price over the last two months and its high loan-to-value (LTV) ratio of 85 per cent will hurt profitability. Analysts have slashed the company's FY13 earnings estimates by 36 per cent. It appears the regulator saw this coming a year ago, when it stipulated that gold finance companies could not have an LTV of more than 60 per cent. In March 2012, Manappuram had stated its LTV ratio was higher at 70 per cent.
Now, it appears the company's LTV ratio was closer to 85 per cent for loans disbursed between August 2011 and January 2012. Analysts say the LTV only factored in the principal amount and not the interest. Manappuram disbursed loans worth Rs 10,400 crore in the third quarter of FY12 and 15 per cent of these are stressed. Typically, such loans are short-term in nature and entail a one-time bullet payment. Religare Insitutional Research says earlier the company had guided for under-recoveries of Rs 40-50 crore, which would be spread over the fourth quarter of FY13 and the first quarter of FY14. "However, with a decline in gold prices and a delay in auctions, losses could increase to Rs 250 crore. Q1FY14 earnings will also be stressed, as the company will not realise any interest income on bad loans (assuming gold prices are stable)."
Ambit says the collateral value of gold is likely to be less than the principal. And many borrowers are unlikely to repay the interest component on the borrowed amount, which would hit profitability in both Q4FY13 and Q1FY14. However, what is interesting is that the current gold price is 9.2 per cent higher than that in January 2012. If stressed loans comprise loans issued a year ago and if the LTV was 85 per cent, there should not be such a crisis. Espirito Santo Securities says: "Management's explanation of the revision in guidance due to a correction in gold prices fails to convince us."
Many rating agencies say though gold finance companies came to them for a rating of their issues, none accepted the rating given to them. Ananda Bhoumik of India Ratings says: "For any loan product that relies on collateral as the chief risk mitigant, the ability to liquidate the collateral in a timely and sustained manner needs to be demonstrated." The element of risk is high as interest is charged at the end of the loan tenure.
Now, it appears the company's LTV ratio was closer to 85 per cent for loans disbursed between August 2011 and January 2012. Analysts say the LTV only factored in the principal amount and not the interest. Manappuram disbursed loans worth Rs 10,400 crore in the third quarter of FY12 and 15 per cent of these are stressed. Typically, such loans are short-term in nature and entail a one-time bullet payment. Religare Insitutional Research says earlier the company had guided for under-recoveries of Rs 40-50 crore, which would be spread over the fourth quarter of FY13 and the first quarter of FY14. "However, with a decline in gold prices and a delay in auctions, losses could increase to Rs 250 crore. Q1FY14 earnings will also be stressed, as the company will not realise any interest income on bad loans (assuming gold prices are stable)."
Ambit says the collateral value of gold is likely to be less than the principal. And many borrowers are unlikely to repay the interest component on the borrowed amount, which would hit profitability in both Q4FY13 and Q1FY14. However, what is interesting is that the current gold price is 9.2 per cent higher than that in January 2012. If stressed loans comprise loans issued a year ago and if the LTV was 85 per cent, there should not be such a crisis. Espirito Santo Securities says: "Management's explanation of the revision in guidance due to a correction in gold prices fails to convince us."
Many rating agencies say though gold finance companies came to them for a rating of their issues, none accepted the rating given to them. Ananda Bhoumik of India Ratings says: "For any loan product that relies on collateral as the chief risk mitigant, the ability to liquidate the collateral in a timely and sustained manner needs to be demonstrated." The element of risk is high as interest is charged at the end of the loan tenure.