With gold prices going south, companies which lend against gold are finding it tough. While the value of the loans has come down, the costs for companies remain the same, thereby putting pressure on their margins and profitability.
For instance in the first quarter, Muthoot Finance reported a marginal growth in net profit at ₹183 crore as against ₹180 crore. Though its Assets Under Management (AUM) increased by ₹3,000 crore in the last three quarters with a 10-15 per cent growth, the lender’s yields on the gold loan portfolio have come down to 19 per cent from 25 per cent a year and a half ago. The reason of falling yields is also because they are passing on the decline in cost of funds to customers.
“Probably, the business will remain flat for some months till the existing loans and interest is serviced,” said George Alexander Muthoot, Managing Director, Muthoot Finance, which is a big player in gold loan financing.
Thomas John Muthoot, Chairman and Managing Director, Muthoot Fincorp, which also is in the gold loan financing business, said the falling gold prices hasn’t impacted their business except the extent of reduced LTV, the offtake gets slightly reduced. “We are watching how the global prices are moving…It is linked to the US Fed rate hike hugely, which is again dependent on the performance of the US economy,” he said.
Gold prices had risen nearly 40 per cent between 2008 and 2013, while reduced 1.7 per cent in 2014. This year, it has further fallen 2 per cent. This has led the yield on lending to gold to fall to 3 per cent from over 4 per cent a few years ago. The fallout of this – some gold loan companies planned to shrink or exit their unviable gold loan portfolios.
Exit strategies Kolkata-based NBFC Magma Fincorp and Captial First had decided to exit their gold loans business. For Magma Fincorp that entered the segment during the second half of 2012-13, business reduced to less than ₹5 crore in 2014-15 from ₹100 crore. Likewise, Capital First minimised its gold loan book to ₹179 crore at the end of March 31, 2015, from ₹ 575 crore a year ago. Gold portfolio as a percentage of total assets has come down to 1.73 per cent from 5.74 per cent last year.
IIFL has also reduced its gold loan book to from 40 to 25 per cent. Nirmal Jain, Chairman, IIFL said, “Gold loan is a volatile portfolio and vulnerable to a fall in gold prices. Strategically, we decided to reduce exposure to this segment and we are doing this successfully.”
According to Amit Saxena, CEO & Wholetime Director, Karvy Financial Services, “Whenever there is sharp volatility, we steady our growth. So, we will see some stabilisation in the next 2-3 months. Then growth will pick up. Growth will reduce from last year to 10 per cent as prices are correcting.
Its gold loan book of ₹270 crore, which is a part of the micro business category, grew by 12 per cent in FY15. In the first three months, the book has grown 3.6 per cent. There isn’t much impact on asset quality as they we are directed by RBI to lend at 75 per cent Loan-to-Value… So, if the prices fall further, only a part of book will go below zero per cent margin. Also, an average closure is 5-6 months, so we don’t hold long positions like 1-2 years. Even if the gold prices come down below ₹ 20,000, it’s not that a large part of book is under pressure,” Saxena added.
Though lenders say they are not facing much pressure, they are asking customers to either pay up more money or get additional collateral towards the loan. “Certainly, we will be more proactive in collection of interest i.e. ask them to pay more frequently as the price is more volatile,” George Alexander said.