Muthoot Finance, Manappuram pare early gains as investors fear defaults by borrowers

Chennai | Updated on August 06, 2020 Published on August 06, 2020

The NBFCs jumped after RBI raised LTV ratio for gold loans for banks to 90 per cent, but closed sharply lower due to concerns that high gold prices will lead to defaults

Share prices of Muthoot Finance and Manappuram Finance, which gained immediately after the Reserve Bank of India (RBI) announced a relaxation in loan-to-value (LTV) ratio for gold loans, turned weak at close on fears of defaults .

“With a view to further mitigate the economic impact of the Covid-19 pandemic on households, entrepreneurs and small businesses, it has been decided to increase the permissible loan-to-value ratio (LTV) for loans against pledge of gold ornaments and jewellery for non-agricultural purposes from 75 per cent to 90 per cent,” the RBI said in its circular sent to all commercial banks.

Almost immediately, share prices of Muthoot Finance gained 5.4 per cent to ₹1,324.80 and Manappuram Finance 6.1 per cent at ₹169 on the BSE. After the initial euphoria, the stocks, however, crashed as investors feared the move will also increase the risk of default as the gold is currently ruling at an all-time high levels.

The stock of Muthoot, which slumped to a low of ₹1,176, closed the day at ₹1,189.75, down 5.4 per cent from its previous close. Manappuram Finance recovered from the day's low of ₹153.20 to close at ₹154.80, down 2.8 per cent from its close a day ago.

Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares & Stock Brokers, said the share prices fell for two reasons. One, the RBI said that the LTV rule is applicable to banks and it did not explicitly referred gold-lending NBFCs. So, if the banks offer loans at 90 per cent and NBFCs at current level, clients may prefer banks rather than NBFCs, which may result in the loss of business for these firms.

However, if these NBFCs too follow the 90 per cent rule, they are fraught with default risk, he said.

Gold prices in the international markets have touched the all-time high of $2,050 per ounce on Thursday, while on MCX gold futures have been trading at ₹55,500-mark, a life-time high for the metal.

“A rather surprising and perhaps unwarranted move in the otherwise well-balanced monetary policy is the decision to raise the loan-to-value ratio for gold loans from 75 per cent to 90 per cent, said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

“The LTV ratio of 90 per cent is excessive in these times of elevated gold prices. A sharp correction in gold price cannot be ruled out since prices have run up too much too fast. In 2013, when gold prices crashed 25 per cent from the 2011 peaks, many gold loans faced ‘rational default’ and gold loan companies faced a major crisis. Unless gold loan providers are discrete in their lending, history might repeat,” he added.

A Chennai-based industry watcher and a jeweller said though the RBI has increased the ratio to 90 per cent, most gold finance companies may prefer to disperse the loan at current pattern only, given the yellow metal's 'elevated' levels. They will rather prefer loss of business to default risk, he added.

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Published on August 06, 2020
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