The gold loan segment in India has seen a consistent growth till the first quarter of the current fiscal, since last year. But will the upcoming 3 quarters see the same growth trend - keeping in mind the changed Loan To Value (LTV) and present gold prices? This requires a detailed discussion.
It is yet tough to give a precise idea about the sectoral growth but it can be assumed that a lower LTV will impact the gold loan segment negatively. LTV is identified as the ratio of a loan to the value of an asset purchased. The RBI has already reverted to its pre-pandemic LTV ratio of 75% from 90%. The central bank earlier made it 90% in August 2020 to provide people with relief. This has encouraged the sector since then.
But now people are more interested in selling their gold jewellery to get the full value. They might not have the repayment capacity if they pledge their gold. Financial stress can also oblige people to move towards selling gold rather than having gold loans, as now it would not be more than 75% of its value.
Gold prices matter
Since the month of August, gold prices in India have witnessed a sharp fall due to better US employment data and the expectations of higher interest rates by the US Fed. Even before that in the earlier month, the gold prices were not substantially high. So, the gold prices started to drop and influenced the gold segment. People are now interested in actually selling their gold rather than putting it out for gold loan, as it will be more profitable on an immediate basis.
The present economic situation is also impacting fresh lending for gold loans. Additionally, some customers are not able to redeem their gold, which might hamper the sector later. Even if the overall gold loan sector grows this year compared to 2020, the pace of growth might be sluggish due to the mentioned reasons.
Example: Manappuram's business seen subdued profits
Manappuram, a leading company in the sector, experienced a poor consolidated profit in the June quarter that failed to encourage investors. The finance company had auctioned gold of Rs. 404 crore in the Q4FY21, compared to Rs. 8 crore in the 3 preceding quarters altogether - which is concerning.
The company's June quarter's gold loan book decreased 13.3%. Their total customer base reduced 2,00,000 and the company expects only 1% growth in the total customer base during FY22. Manappuram has also reduced its average ticket size assumptions. Their gold asset under management (AUM) for the June quarter dropped 6.8% on a year-on-year basis to Rs. 16500 crore from Rs. 17700 crore.
Commenting on the downfall in the gold loan segment, George Alexander Muthoot, Managing Director, Muthoot Finance told a leading English daily "We are redrawing our strategies in terms of non-gold lending business and we are confident to emerge stronger as the environment improves. On the gold loan front, we are targeting 15% growth in the remaining 3 quarters." - This certainly does not show aggressive anticipation.
The company might have taken guarded steps as the gold prices in India are declining gradually. With a lower price of gold people might lose interest to recover their collateral gold. This will lead to a stressed position for any finance company. So, to de-risk itself, Manappuram could have auctioned their assets.
In the long term, as the RBI thinks more about the sector and gold prices change again, the situation might change. But the present situation and a recovering economy certainly will not be a preferable atmosphere for the gold loan sphere.