Gold loan NBFCs make hay for now

Gold loan providers Muthoot Finance Ltd and Manappuram Finance Ltd are currently in the spotlight with prices of the yellow metal scaling new highs. Domestic gold prices are hovering above the psychological ₹65,000 per 10-gram mark, indicating a robust demand for gold loans. This augurs well for both Muthoot and Manappuram as it could lead to growth in their assets under management (AUM). Further, higher gold prices may help contain the margin compression to a certain extent amid rising borrowing costs.

These non-banking financial companies (NBFCs) are also poised to benefit from the recent debacle at peer IIFL Finance. The Reserve Bank of India has directed IIFL Finance to stop disbursing and sanctioning gold loans. As the two incumbents fill the gap created by IIFL’s absence, they could see market share gains in the interim.

“IIFL Finance had a 13% market share in FY23, up 420 basis points over four years, versus 38% for Muthoot and 12% for Manappuram,” said a report by

Kotak Institutional Equities. The gap was reduced further in the nine months ended December (9MFY24). This is going by the solid 35% growth in IIFL’s gold loan book in 9MFY24 compared to 22% and 12% growth in the loan books of Muthoot and Manappuram, it added.

In this backdrop, Kotak finds tailwinds to Muthoot’s gold loan growth. The Muthoot management has maintained FY24 gold loan growth guidance at 15%. Given its relatively higher exposure to gold loans, Muthoot could see a greater benefit from elevated gold prices than close competitor Manappuram. To be sure, shares of both these companies have moved neck and neck over the last one year, gaining about 48%. Manappuram’s diversification strategy, which aims at taking gold loans in the overall portfolio mix to 50%, could buoy sentiment.

“Stabilization in gold loan yield, turnaround in the MFI business and traction in other segments such as housing/ MSME are noteworthy developments in Manappuram Finance over the last 12 months,” said an ICICI Securities Ltd report.

Given the cyclical nature of the gold lending business, both NBFCs are trying to expand into segments such as vehicle loans and microfinance. So far, Manappuram has been moving at a relatively faster pace.

That said, Manappuram’s investors should take note of some looming risks. “Incrementally weaker AUM yield balance in gold; and asset quality issues with growth in nongold (Q3 saw decline in asset quality across segments),” ICICI Securities said. Manappuram management still guides for 8-10% AUM growth in gold loans.

Meanwhile, competition from banks remains a niggling worry for investors in both the stocks. Recall that following the covid-19 pandemic, banks increased focus on gold loans owing to muted traction in other segments. The secured nature of gold loans with relatively lower risks made this business segment a more lucrative alternative for them. Banks seem to be gaining a tighter grip.

“As per our analysis, the dominance of banks has been improving in personal gold loans even after excluding agriculture activity-led gold loans,” said Incred Research Services. The firm is of the view that like the housing finance business, gold finance will also be largely penetrated by banks against NBFCs, with a consistent rise in their market share through increased penetration and by offering lower interest rates. In the near term, a typically strong quarter, supported by higher gold prices, should help gold finance companies sail through the March quarter. However, amid elevated competition, regulatory developments concerning underwriting rules, and the quality of collaterals need closer monitoring.