The Reserve Bank of India (RBI) regulations announced on Tuesday could have a negative impact on gold financiers such as Muthoot Finance and Manappuram Finance. While their growth and margins will be impacted, the risks associated with the gold lending business would also be curtailed. Positively, this could lead to lower borrowing costs for these companies in the medium to longer term, believe analysts. In the near term though, these measures will have a negative impact on their performance.
While the lower loan-to-value (LTV) ratio will restrict growth in assets under management (AUM) of these companies, stricter KYC (know your customer) requirements (like PAN card for loan over Rs 5 lakh, cheque disbursal for loans over Rs 1 lakh) could make borrowers shift to unorganised lenders for their credit needs.
"The business model of gold loan companies was centred on higher LTVs and quick turnround time. These guidelines would impact both and would lead to a decline in their loan portfolios. Since interest rates on lower LTV loans are lower and operating expenses of gold loan non-banking financial companies (NBFCs) are fixed in nature, the decline in profitability would be higher than the decline in loan book," says Pankaj Agarwal, analyst at Ambit Capital.
Muthoot and Manappuram scrips fell five per cent on Wednesday against a flattish Sensex. These will have to improve their cost management to aid profitability. Till then, their stocks may continue to underperform.
Competition, lower margins
While the RBI had earlier capped LTV for gold loans at 60 per cent, it has standardised the method to calculate gold value. Companies will now have to take the average price (of the preceeding 30 days) of 22K gold, in line with the Bombay Bullion Association, to arrive at the value (for lower quality gold, the value will have to be adjusted accordingly). The RBI has also said making charges cannot be included in the LTV. This becomes important as most gold financiers include making charges in LTV and take up their effective LTV ratios to 70 per cent. This will result in lower yields. Muthoot and Manappuram may lose to competition, specially from the unorganised segment. Since gold loan companies charge 22-24 per cent interest rates and banks 13-15 per cent, the differential will now narrow. Positively, firm gold prices could provide some support.
"Domestic gold prices have appreciated 15 per cent since June - the price appreciation will make the transition easier at the current juncture," says Nischint Chawathe, analyst at Kotak Institutional Equities.
The RBI has also mandated prior approval for opening more than 1,000 branches and to have appropriate facilities for gold storage. Muthoot and Manappuram have more than 1,000 branches and have slowed additions. Most branches of these have gold storage facilities and, hence, these two norms will have a negligible impact on them. However, the RBI will have a direct control over expansion of these players in the longer run.
Verification of gold ownership for over 20g and cheque disbursement of loans over Rs 100,000 will also reduce the competitiveness of gold financiers and increase their paperwork.
"Currently, NBFCs are relying on self-declaration by customers for ownership verification. If the RBI insists on any other documents, gold loan companies may lose market share to the unorganised sector," says Siddharth Teli, financials analyst at Religare Capital Markets.
De-risking gold price volatility
The recent volatility in prices has highlighted the vulnerability of gold financiers to adverse movements in the metal. The prices corrected in the June quarter, leading to a higher asset quality stress for Muthoot and Manappuram.
"In an attempt to de-couple their business model from gold price volatility, gold financiers initiated measures such as incentives for periodic interest repayment, conservative accounting policies, keeping LTVs low and launching equated monthly instalment-based products. These measures significantly increase the margin of safety for the lenders," says Digant Haria, analyst at Antique stock broking. All these measures, with lower LTV, will help lower the default risk for these companies.