Gold financiers in a sweet spot: Muthoot, Manappuram can grow at 10-12% pa

The share price of Muthoot Fin has risen 31% over last year, but Manappuram underperformed with 9% return

One category of counter-cyclical businesses that can perform when an economy is not doing well is gold–backed lending. When households are financially stretched, they offer gold as security in traditional pawnbroking.  

Unlike other retail loans, gold-backed loans have near-zero default risk. There is a regulatory cap of loan-to-value of 75 per cent. Repayment schedules are short and the asset is easily auctioned if there’s an NPA. Gold loan NBFCs have historically been able to generate 25 per cent return on equity.

Many banks and NBFCs offer loans against gold. The RBI data says gold loans by banks rose 13 per