Covid-19: Gold financiers keep the shine intact

Liquid collateralbacked loans, pricing power augur well

At a time when the country is reeling from the impact of the global outbreak of coronavirus (Covid-19), non-banking financial company (NBFC) stocks were among the worst hit. Their performance is expected to be hit due to stress across sectors. While these concerns are justified, gold finance companies — Manappuram Finance and Muthoot Finance — may be less impacted.

There is no doubt that both financiers have also faced operational disruption due to the lockdown; they have shut their branches. There could be some asset quality pressure as well. However, the highly liquid collateral (gold)-backed loans with typical asset tenure of less than 12 months and pricing power (to pass on higher costs) should augur well.

“The safety of money is most important in the current situation, when the degree of impact of Covid-19 is very difficult to ascertain. Nobody is able to 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-retail, HDFC Securities.

While gold loans account for 67 per cent of Manappuram’s consolidated loan book as of December 2019, it is 87 per cent in the case of Muthoot. This, along with 60-68 per cent loan-tovalue (LTV; loan as a percentage of collateral value) ratio, the recovery rate, even in the case of default and some correction in gold prices, should be good.

With high LTV ratio, Jasani believes the chances of gold loans going bad are minuscule. A downside risk to this would be a delay in gold auctions if the lockdown prolongs.

“Other business segments such as microfinance will see some delinquencies and there could also be some write-offs if the situation persists,” said Bunty Chawla, analyst at IDBI Capital. But he believes gold finance companies are a relatively better option.

Concerns over Manappuram’s non-gold loan book (33 per cent of loans) have led to the stock underperforming (42 per cent fall in one month versus 30 per cent for Muthoot).

Further, short tenure of assets and reasonable liquidity position, as stated by both companies, and the Reserve Bank of India’s recent announcement on liquidity push are also comforting and should help address any assetliability mismatch.

Notably, there could be spurt in loan demand after the lockdown period. According to Manappuram’s management, “Our past experience is that in periods of economic crisis, the wider financial services sector is put to stress and lending activity slows down. Gold loans had then become the fall-back option for borrowers denied access to their regular channels.”

Will it be different this time? The jury is still out.