The near 5% fall in gold futures in the domestic market may have sent shares of gold loan companies south. However, these lenders are unperturbed by the potential erosion in collateral and the resultant threat of default by borrowers.
George Muthoot, managing director of Muthoot Finance said that, while giving out loans, around 15-20% decline in gold prices is factored in. Three-month MCX gold futures fell to 18-month low of R26,250 per 10 gm on Monday, down 5.3% from the previous close. The spot gold in Mumbai was R26,965 per 10 gm.
The yellow metal had hit an all-time high of R32,359/10 gm on November 26 and the spot gold in Mumbai had fetched R32,500/10 gm that day.
A report on gold loan companies by an internal committee of the Reserve Bank of India had put a near 15% probability of a 10% fall in gold prices within the next six months. The report was released in January.
Shares of Muthoot Finance Corp and Mannapuram Finance Corp fell at least 10% on Monday due to the crash in gold prices and reports that this could prompt the RBI to monitor these companies.
?Since we are financing only household jewellery, the impact of such fluctuations is minimal,? said Muthoot on the gold price fall.He added that the company has not seen a sharp rise in non-performing assets and that the tenure of the loans on an average are 3-6 months. A big fall in collateral could lead to borrowers defaulting as the outstanding loan amount is higher than the gold value.
But even analysts at rating agencies are not sweating over it. “There has been significant correction in the value of the collateral. This correction has also lead to some delinquencies. But not all lending has been at the highest LTV. So, we would be closely monitoring the situation for now and see how it pans out,” said Vibha Batra, analyst at Icra.
The RBI’s norm that gold loan companies can give only 60% of the value of the collateral as loan will also help buffer the impact.
The RBI committee had recommended that the loan-to-value ratio be hiked to 75% for gold loan companies as it felt that an idle asset like gold must be monetised. According to the report, outstanding gold loans of such NBFCs were around R40,000 in March 2012.