Amid coronavirus lockdown, gold finance companies may be less affected
At a time when the country is reeling from the global coronavirus (Covid-19) epidemic, shares of non-bank financial companies (NBFC) have been among the hardest hit. Their performance is expected to be affected due to the tensions in the sectors. While these concerns are justified, gold finance companies – Manappuram Finance and Muthoot Finance – could be less affected.
There is no doubt that the two financiers have also faced operational disruptions due to the foreclosure; they closed their branches. There could also be some pressure on asset quality. However, highly liquid (gold) collateral-backed loans with a typical asset life of less than 12 months and pricing power (to pass on higher costs) should bode well.
“Money security is most important in the current situation, as the degree of impact of Covid-19 is very difficult to determine. No one can estimate how long it will last. I think gold finance companies are a better and safer choice among NBFCs, ”says Deepak Jasani, head of research and retail, HDFC Securities.
While gold loans represent 67% of Manappuram’s consolidated loan portfolio as of December 2019, they represent 87% in the case of Muthoot. This, with a loan to value ratio (LTV; loan as a percentage of collateral value) of 60-68%, the recovery rate, even in the event of default and gold price correction, should be good. .
With a high LTV ratio, Jasani thinks the chances of gold loans going badly are slim. A downside risk would be a delay in gold auctions if the foreclosure continues.
“Other business segments such as microfinance will fail and there could also be write-offs if the situation persists,” said Bunty Chawla, analyst at
Capital of the IDBI. But he thinks gold finance companies are a relatively better option.
Concerns over Manappuram’s non-gold loan portfolio (33 percent of loans) led to the stock’s underperformance (42 percent in one month vs. 30 percent for Muthoot).
In addition, the short duration of assets and a reasonable liquidity position, as reported by both companies, and the recent announcement by the Reserve Bank of India on the liquidity surge are also heartwarming and should help address any asset mismatches- passive.
Notably, there could be a surge in demand for loans after the foreclosure period. According to Manappuram management, “Our past experience is that in times of economic crisis, the financial services industry as a whole is strained and lending activity slows down. Gold loans then became the fallback option for borrowers deprived of access to their usual channels. “
Will it be different this time? The jury is still out.