With the rise in gold prices and decreasing competitive pressures, listed gold loan providers Muthoot Finance Ltd and Manappuram Finance Ltd have seen varying impacts on their stocks. Over the last three months, Muthoot Finance’s stock has increased by 28%, while Manappuram’s stock has only seen a modest 4% increase.
In Fiscal Year 2024 (FY24), Muthoot’s gold loan business experienced an 18% year-on-year growth in assets under management (AUM), surpassing its 15% target. For FY25, the company is maintaining its growth guidance at 15%. On the other hand, Manappuram reported a 9% growth in gold loan AUM in FY24 and anticipates better performance in FY25.
Both Muthoot and Manappuram were considered beneficiaries of the temporary ban on peer IIFL Finance Ltd by the Reserve Bank of India in March. Additionally, the intense competition from banks and other non-banking financial companies (NBFCs) during the pandemic is now easing.
In Q4FY24, banks’ gold loan portfolios collectively saw a 15% growth, a decrease from the 19-26% growth reported in the previous four quarters, according to a Kotak Institutional Equities report.
Management from both Muthoot and Manappuram have addressed concerns regarding the RBI’s cap on cash disbursements in gold loans at ₹20,000, stating that it has not significantly impacted their operations. They have observed strong growth in gold loans even in April and May.
Margins and Competition
Rising gold prices typically lead to increased demand for gold loans, signaling a positive outlook for these lenders. However, close monitoring of margins is crucial.
Muthoot’s net interest margin (NIM) has improved sequentially, driven by higher yields. The company anticipates a rise in the cost of borrowing to 9% from the current 8.55%. They express confidence in managing an increase in borrowing costs and may pass this on to customers. This shift in stance reflects reduced competitive intensity in the market.
Conversely, Manappuram’s NIM decreased sequentially due to a rise in borrowing costs. The company has a higher share of non-gold loans in its portfolio, raising concerns about asset quality. Particularly, its subsidiary Asirvad MFI has reported asset quality deterioration and high credit costs. Rapid expansion in non-gold segments could pose asset quality risks if not managed well.
Both companies are diversifying to mitigate the cyclical nature of the gold lending business. Muthoot has increased the share of non-gold assets in its AUM and plans to continue this trend over the next few years.
Despite the current rally in gold prices, Muthoot needs to closely monitor asset quality in its microfinance subsidiary, Belstar. The company expects limited traction in the vehicle finance segment due to intense competition and its limited presence in that market.
Branch expansion remains a significant growth driver for Muthoot, especially after its recent share price rally. The company is focusing on opening more branches to enhance customer acquisition and drive further growth in gold loans.
Insight: It is essential for gold loan providers to maintain a balance between expanding their loan portfolios and managing their margins effectively amidst fluctuating gold prices and competitive pressures. Additionally, diversification into non-gold assets can help reduce the risks associated with the cyclical nature of the gold lending business.
