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Reserve Bank of India circular dated March 21 required non banking financial companies to cap loan amounts at 60% of the value of gold pledged. Traders responded by selling off both companies.
Manappuram Finance dropped to Rs.38. Muthoot Finance dropped to a new low of 130.30 on the
day the news of RBI diktat reached the markets. However, both stocks
bounced back on the very next day.
Does investing in these two companies
guarantee returns in the future? Will these two companies strive in
the future? Can these companies sustain the monstrous growth they
have been exhibiting in the past many years? All these questions are
well worth the considering. I don't have the answers, really!
Gold Loan Business in India
Rural and urban Indians would pawn
their gold jewellery to meet financial emergencies. Almost every
Indian bank has counters for gold loans. State Bank of India and its
subsidiaries now offer gold loans at interest rates as low as 4% per
annum.
There are also thousands of tiny
finance companies (micro lenders) offering loan against gold. The
interest rates are 12%, 14% or more, depending on where you are doing
business.
Muthoot Finance is the first major
brand to offer gold loan through a network of offices set up across
Kerala and in almost all parts of India. Manappuram also followed
suit and they too witnessed some major growth in their gold loan
business.
Gold as Security
People can take loan against jewellery
only. Coins or bars are not accepted. Traditionally, women would buy
gold ornaments, not only as ornaments, but also as an investment.
They have few investment options.
Needless to say, these ornaments have
more than monetary value for the women who own them. In many cases,
the gold ornaments are handed over to daughter from mother. The gold
jewellery has deep sentimental value too.
People pledging the gold would try
their level best to close the loans and to take the jewellery back.
This is why gold loan is very profitable for banks, non-banking
finance companies like Muthoot Finance, Manappuram Finance, and for
thousands of petty lenders spread across the country.
RBI Diktat
Gold loan companies compete against
each other to lend money against security of gold. In some cases,
they lend more than the value of gold. I have seen advertisements
telling you could get 125% the value of gold as loan. In most cases,
you can get 80% to 85% of value as loan. This is where RBI stepped
in.
Indian banking is fairly conservative.
Being conservative was one reason why Indian banks survived the past
decade, which saw hundreds of American banks shutting down.
On the face value, it looks like RBI
diktat would cripple the growth of gold loan in the non-banking
sector. On closer look, you can see it is about doing business the
conservative way. You don't blow the value of gold out of
proportions.
There will always be borrowers who
can't repay what they have borrowed. While the value of gold could
offset any loss, it is prudent to lend only 60% of the value of the
gold.
Currently, a borrower can get a loan of
more than Rs.12,000 when you pledge 8 grams (one sovereign) of gold.
Earlier, they could get more than Rs.17,000. The gold jewellery costs
Rs.20,000 for eight grams.
Back to Muthoot and Manappuram
Both the companies were growing at 50%.
According to news sources, Muthoot has loans worth Rs.24,000 crore
against jewellery worth Rs.40,000 crore. Manappuram has loans of
Rs.11,000 crore. On average, both the companies are lending just more
than 60% of the value of the gold.
Is it Wise to Buy Muthoot and
Manappuram Shares Now?
One point. It is not wise to sell them
now. These companies can stay in the business despite the diktats.
Both the companies get hundreds of new customers every day from
almost all parts of India.
In addition, they are forced to be
conservative and to be safe against volatilities of any kind. Now we
have two non-banking companies acting almost like a bank.
In addition, these companies have
non-lending money business too - money transfer from foreign
countries. Money transfer in association with Western Union Money
Transfer is a major business, especially in Kerala, from where the
youth are packed to the gulf countries, Europe and to around the
world for employment.
Is it good to hold to these companies?
(NO GUARANTEES): It is good to buy and hold on to these companies.
Both of them have big, growing networks, reaching out mainly to the
rural people, who don't get enough banking services.
If there are bad signs, we can see them
in advance. As of now, the RBI directions only secure them against
volatilities that have sank many a banks on the other side of the
world.
