Muthoot Finance and Manappuram Finance are likely to continue with own-book lending (against co-lending practices started by some peers) and prefer the high yield/ low ticket size buckets compared to low yields as seen in FY22, according to an ICICI Securities report.

This is irrespective of demand recovery or improvement in competitive intensity.

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I-Sec research analysts noted that, in FY22, there was not only higher competition but also lower demand for gold loan in low ticket size segment.

This resulted in Muthoot/Manappuram to make changes in yields and ticket sizes in terms of target segments.

For example, Muthoot/Manappuram’s yield to AUM (assets under management) declined to 19.5 per cent/21 per cent in FY22 from 21.7 per cent/25.6 per cent in FY21, respectively, the report said.

Furthermore, proportion of higher ticket size in AUM also increased as extremely lower-rated teaser schemes were launched to attract such customers. This can be seen in increased proportion of more than ₹2 lakh ticket size AUM of 33 per cent in FY22 vs 19 per cent in FY21 for Manappuram, the analysts’ said.

However, this experiment has given enough evidence that such growth for profitability is sub optimal in results (Return on Equity dipped to 23.5 per cent /17.6 per cent in FY22 from 27.8 per cent/27.7 per cent in FY21 for Muthoot/Manappuram), they added.

As a strategy, the analysts’ expect Muthoot/Manappuram to go back to their original segments, which should automatically uplift the yields irrespective of demand recovery or competitive intensity.

The report assessed that Muthoot’s debt to equity and cash and bank balance as a percentage of total assets were 2.5 times and 9 per cent, respectively, as of June 22. For Manappuram, they were 2.3 times and 6.5 per cent as of March 22.

“Co-lending solves one problem -- supply of capital, but Muthoot and Manappuram have ample access to the same.

“Therefore, they would first look to deploy the same adequately and increase the leverage. This should ideally help them earn higher absolute profit after tax and eventually RoE especially considering that yields are expected to improve ahead,” the analysts’ said.