Till last year, these companies would lend up to 80-85 per cent of the value of the ornament. In order to increase the loan amount, making-charges were included in the total value of the ornament. Clearly, the companies gave more loans against the gold jewellery than was prudent in the hope that prices of gold would continue to move up. But with prices falling, borrowers are not coming back to collect the jewellery as the intrinsic value of the ornament is less than the loan amount. So, over the last few quarters, these companies are seeing rising bad loans.
The customer bases of these companies is also seen to be shrinking over the last few quarters. The customer base of Manappuram Finance stood at 1.52 million in March, compared with 1.55 million in December 2012. The customer base had touched a peak of 1.62 million in March 2012 and since then, it has been declining. If companies have to grow their loan books, they have to add new branches, which will be difficult this year, explains Pradeep Agarwal of Emkay Global.
Manappuram currently has 3,000 plus branches. It is not planning to add any more branch this year as the company wants to consolidate its business. I Unnikrishnan, managing director of Manappuram Finance, says: "This is a time-tested business and ideally, should grow 20 per cent, but this year, it may not be the case as gold prices have fallen, and we are not adding new branches."
Not only is the customer base shrinking, but the average loan per branch is also falling. Compared to FY12, Muthoot Finance's loan per branch has declined four per cent in FY13. It's a well known fact that in order to grow, these companies need to expand their geographical reach to attract new customers. Compared to 400 branches it opened in FY13, Muthoot will open only 250-300 branches in FY14.
What has made matters decidedly sticky for these companies is also the higher loan amounts they lent against the value of the gold in the past. In the absence of any regulation and one-way movement in gold prices, gold finance companies like Manappuram Finance and Muthoot Finance had high loan to value (LTV) ratios (80-85 per cent). The LTV ratio is the amount of money a borrower gets against the collateral. A higher LTV implies higher risk in case the value of the asset falls. While the prices of gold were rising, there was no problem, but once these started coming down, the problem started.
The stress of rising bad loans and slowing growth is evident from the quarterly performance of these companies. Over the last four quarters, Muthoot Finance has guided for 10 per cent growth in FY14. All the other return ratios also seem to show signs of weakening fundamentals.
Compared to FY12's 4.4 per cent, Muthoot's return on average retail loans has come down to 4.05 per cent. The loan book has also only grown by six per cent in FY13 to Rs 26,000 crore. This year may again see similar growth rates. Manappuram Finance is expected to consolidate its balance sheet in FY14. Till gold prices stabilise, these companies will also find it difficult to auction gold belonging to customers who have defaulted, which would delay recovery. Kunal Shah of Edelweiss Securities says he is vigilant on Manappuram's asset quality after the recent correction in gold prices. Analysts also say the regulatory overhang is not yet over for the sector. Given that the outlook for gold remains negative globally, these companies may continue to see a steady build-up in stressed loans.
- Muthoot Finance expects 10% growth in AUMs in FY14
- Muthoot to open around 250 branches in FY14, compared to 404 branches it opened in FY13
- Muthoot's gross non-performing loans rise from 1.5% in Q3FY13 to 2% in Q4FY14
- Manappuram Finance's assets under management declined 14% year-on-year to Rs 9,950 crore in FY13
- Manappuram has auctioned gold worth Rs 150-170 crore so far
- Manappuram's gross non-performing assets double to 1.2% of total assets in Q4FY13
- Manappuram to consolidate balancesheet in FY14 further
- Shares of gold loan companies underperform Bankex by over 50% in last six months
- Analysts expect gross non-performing loans could stabilise by September if gold prices stop falling