Monday, May 25, 2020

Manappuram Gold Loans to Rebound Post Lockdown?

Non Banking Finance Companies (NBFCs), together with banks, tend to do well during economic booms when credit growth is high. But NBFCs focusing on gold loans, like Manappuram Finance, have historically done even better during difficult periods for the economy. This is a peculiar strength of the gold loan business that is putting the focus back on players like Manappuram, even in this most difficult period for lenders, due to Covid-19, the extended lockdown and moratorium on loans. Moreover, led by its MD & CEO, VP Nandakumar, the firm had pioneered products like online gold loans, which came in handy during the lockdown period, while its conservative policies like lower LTV ensures safety as well as room for growth as and when demand rises.

The first reason why gold loan NBFCs like Manappuram performs well during economic stagnation, is about the product itself. Periods of economic difficulties are marked with poor income growth for both individuals and small businesses, but at the same time they have to keep meeting their essential requirements. The normal way out for individuals and small businesses then is to take a personal loan or small business loan to stay afloat. However, this is the same time when reluctance to lend is maximum from most banks and NBFCs.

This is understandable, as by the time individuals and small businesses apply for fresh or add-on loans, banks and NBFCs would be stressed out the maximum as repayments from their larger accounts like corporate, MSME and home loans would be getting defaulted. They would have no risk appetite to take on further unsecured credit like personal loans or small business loans.

This is where a secured loan product like loan-against-gold, commonly called as gold loan, excels. Most households and small business owners in India have some personal gold holding as jewellery and they resort to monetize it through gold loans. Even stressed banks and NBFCs have no issue in offering gold loans, as it is fully secured with a pledge of the customer’s gold. That is why even some public sector banks have started dedicated gold loan verticals during this lockdown period.

In other words, gold loan is a unique and preferred product in stressed times by both borrowers and lenders. But if many entities offer gold loan, won’t this be a crowded market? Theoretically yes, but there are other considerations. Dedicated gold loan companies like Manappuram have a distinct edge in this business due to various reasons.

Gold loans are offered by everyone from local moneylenders to large private and public sector banks. Gold loans from local moneylenders tend to be the costliest and least secure for borrowers, as these lenders in the unorganized sector are basically loan sharks. At the other end of the spectrum, gold loans from PSU banks tend to be the cheapest for borrowers, but come with many hassles. For instance, many public and private banks prefer to give gold loans only to their depositors, and even for such customers it is a time-consuming process as most banks don’t have dedicated staff to handle gold loans at the branches.

Between these two extremes, dedicated gold loan companies like Manappuram Finance offer the optimum experience. As organized players regulated by Reserve Bank of India (RBI), they offer competitive interest rates, high security and above all, lightning fast disbursals for customers. This explains the high growth experienced by gold loan companies, especially during the last two decades.

A pressing question , however, is whether the current crisis due to Covid-19 and the extended lockdown is similar in impact with earlier crises like demonetization and the global financial crisis of last decade. While Covid-19 is definitely more serious than earlier crises, it has also unleashed one of the most favorable conditions for the growth of gold loan companies, which is the soaring gold price. As most other asset classes fell due to the crisis, global funds kept on buying gold as the only secure investment option.

Obviously, better gold prices translate to higher loans, and it has always been one of the clearest markers for the growth of gold loan companies. For dedicated players like Manappuram, it offers an added advantage as they have open credit lines with most of their small business customers, who can avail additional loans from the existing gold pledges due to the higher prices now.

A second question with regard to the uniqueness of the Covid-19 crisis is how the government ordered moratorium on loan repayments would affect Manappuram. But here too, the firm has witnessed a huge strength with over 90% of its gold loan customers not opting for moratorium. One reason for this is that the pledged gold is almost 100% made up of personal jewellery of the household, and most customers care deeply about it and would like to conclude the loan as planned to redeem the jewellery which has high sentimental value, and now more real value too as gold price is appreciating.

The foresight of Manappuram’s MD & CEO, VP Nandakumar during the good times has also come to the rescue of the firm during these difficult times for NBFCs. The firm has been an early mover and leader in offering online gold loans that disburse and collect EMIs digitally. During the ongoing lockdown, the firm could disburse over Rs. 300 crore digitally.

Manappuram's profit after tax grew 43% year-on-year (YoY) at Rs. 392.7 crore in the quarter ended March, compared to Rs. 274.6 crore in same period last fiscal. Total income rose 38.7% to Rs. 1618.2 crore in Q4, against Rs. 1,166.5 crore in the year-ago period.

The business is quite secure too for gold loan companies like Manappuram which have followed a prudent Loan-to-Value (LTV) ratio. LTV denotes what percentage of the pledged gold’s value is offered as loan. While RBI allows an LTV of 75% on gold loans, Manappuram’s average LTV is only around 60% or lesser, which provides enough security in case gold prices correct.

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