Gold loan business not protected, proves Manappuram Finance
Bank of America’s Merrill Lynch unit reduced its price target for Manappuram shares by 58% and cut its recommendation to ‘underperform’ from buy because of the risk to future earnings, on Wednesday. Manappuram Finance had disbursed gold loans aggregating Rs 1,500 crore at an aggressive loan-to-value (LTV) ratio of 80-90%, largely between October and December 2012. The loans are likely to come under pressure due to the fall in gold prices, coupled with Reserve Bank of India\'s decision to cap LTV at 60% for all gold loan companies.
Analysts say the perception that the gold-loan business is protected due to the value of the asset may not hold, since over 15% of the disburements made by Manappuram Finance in the third quarter of the last financial year had turned bad. This would mean the company will incur losses even if the gold prices were to be stable.
After a meeting with the company\'s management on Tuesday, brokerage Ambit Capital came out with a report stating that Manappuram Finance\'s last quarter profit will be affected due to a 4-5% correction in gold prices, which will erode the security underlying the loans, making it insufficient to recover these loans. The company\'s share price tanked, falling over 19% on BSE once the
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