Despite sharp fall in stock prices, gold loan firms put up a brave face

Say fluctuations factored in; robust collection mechanism caps risk

The shares of the two largest gold loan companies, Muthoot Finance and Manappuram Finance, fell sharply today on the back of declining prices of the yellow metal. Investors were concerned on the reducing value of the collateral of such firms. The companies, however, put up a brave face, saying effective recovery mechanism would ensure profitability remained intact.

Manappuram Finance hit a 52-week low of Rs 17.4, dropping 9.84 per cent at the end of the day on the National Stock Exchange. Muthoot Finance Limited was down 12.71 per cent over the previous day’s close, closing the day at Rs 131.5.

Both companies give loans taking gold as collateral. A fall in gold prices is expected to result in underrecoveries and impacts profits.

Prasanth Prabhakaran, president (retail broking) at India Infoline, said a combination of the correction in the yellow metal and worries over bad loans in the sector contributed to the decline in the two companies.

“The fall in gold price contributed to the fall. There have also been worries for some time over non-performing assets in the sector,” he said.

However, gold loan companies said their collection mechanism negates risks arising from a fall in gold loan prices.

“A 15-20 per cent price fluctuation in gold prices is already factored in our business model. It is not a new event which has come up,” said George Alexander Muthoot, managing director, Muthoot Finance Ltd.

Since the company is only financing household jewellery, the impact of fluctuation of gold prices was minimal and the firm had not seen any substantial rise in non-performing assets, said Muthoot.

  “More than the gold price, it’s the collection mechanism which is important in this business. We have institutionalised a system of regularly calling up the borrower reminding him about the dues on the loan, and every branch has a monthly interest collection target. These measures ensure regular interface with the customers and engenders a repayment habit in the borrowers,” Muthoot said.

While the loans disbursed by Muhtoot have a tenure of 3-6 months, the average ticket size of loans is Rs 40,000 and 60 per cent of the loan book has a ticket size below Rs 1 lakh. About 70 per cent of Muthoot branches are in semi- urban and rural areas.

Analysts continued to paint a gloomy picture on the outlook of the yellow metal and said recovery prospects of gold prices are weak due to lack of any trigger.

“The prospects of any meaningful recovery in gold remain weak and given the lack of any major triggers in the near-term, gold prices are unlikely to reverse the downtrend anytime soon. Short-term pullbacks are entirely possible, given the speed at which prices have declined towards 27,300 levels, but would only consolidate before a further fall,” said Kishore Narne, head of commodities, Motilal Oswal Commodities Broker, adding that there was a possibility  of another 12-15 per cent fall in the domestic markets before the end of 2013-14.