Yes and giving good window to accumulate!
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Company To Consider Issuance Of Private Placement Of Rated, Listed, Secured, Redeemable Ncds
too many people writing obituaries of gold finance companies. Don’t know if it is a contrarian sign to add more or just take an exit route to reduce underperfoamnce of PF.
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Gold loan companies used to offer long tenure loans until the crisis in 2012-14 when gold prices declined. Since these are balloon loans, interest is added to the principal and repaid at the end of the loan. Accrued interest becomes an unsecured loan. Now these companies are offering shorter tenure loans of 3 month and 6 months so that accrued interest plus principal does not go beyond value of the collateral. However, now customers are having trouble repaying the loan in six months and that is causing NPAs to rise.
As per revised RBI NPA recognition norms, these NBFCs have to recognize an asset as NPA sooner than before. These companies are letting customers take more time to replay the loans instead of auctioning the gold as they fear losing customers if they auction the collateral. With loan book growth in single digits, investors are asking for a pickup in growth and not slowdown.
Manappurum is trying out the MFI route as MFIs are offering similar interest rates without collateral and taking away Mana’s customers. Muthoot is somewhat slow in MFI route as defaults are more. Overall, lending to the bottom of the pyramid is a risky business because customers can often and suddenly lose ability to repay.
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Actually, the NPAs primarily come from the big guys like Vijay Mallya and JPA. The poor guy usually pays up. He can’t run away or hire a lawyer. He can’t siphon cash as well. MFIs have better repayment rates than most of the banks or even housing finance cos.
We should use facts and numbers as well!
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Four Muthoot Finance branches cheated by pawning silver jewelry covered with a thick coat of gold. Wonder how gold loan companies control this risk.
Was planning to start a thread on investing in gold through equity route for last many days but somehow could not do it.
Why this ?
Principle of wise investing suggests that one should always diversify into different asset classes for safety and to benefit from cyclical movements in those.
Am nowhere suggesting to directly invest in gold, the idea is to bet on gold via equity.
Today came across 2 interesting threads which capture my feelings on the same.
Background : Gold has been in bearish zone for last 7-8 years. Internationally gold -prices had risen upto US$1948 per ounce in 2011 and after that they been moving in a range of US$ 1100 to Us$ 1400.
We have not felt the drawdown of this extent due to depreciation in INR in last 7-8 years.
Few studies and experts suggest that we may be entering into bullish zone in next few years , may be from 2020.
Reasons have been beautifully captured in this twitter thread, the author is a famous expert in international finance and asset classes . The bull case scenario is US$ 5000/ounce ( yes, almost 4 times of today’s prices) :Gold Bull case scenario
How to play gold in India via equity
Here’s another beautiful twitter storm which almost captures all the points that I was planning to write. Author suggest to invest via Manapuram and Muthoot Finance .
Both of these are gold loan companies . As per author , even if gold does not play out as predicted or rupess/dollar exchange rate does not change in next few years, still an investor can have 10-12% annual returns via investing in these companies . And if gold and US$ plays out, that would be the icicing on the cake . Here is the link : Gold via Equity in India
Hope these 2 threads give some food for thoughts for every reader.
Look forward to your views and opinions .
Dis :recently invested in Muthoot Fin
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Do you know relation of Gold Price and these finance companies? How long this relation is maintained?
Currently Gold is going higher but these companies is going lower with market. So, it looks like there is a limit when higher gold can benefit these companies?
Higher gold prices are not linked to a gold loan company setup. These companies are lenders. The only difference is that they Lien GOLD instead of other asset like a home in case of LAP, or Auto in case of an Auto loan asset.
The gold loan model is more resilient because in case of large number of defaults. Gold may have a market to be sold into but may not be the case for a default on home or a car.
Value of Muthoot or Manappuram will always be a reflection of how low are the defaults and how fast they can grow their loan book. HENCE, price of gold is irrelevant to the share price of these companies in my view.
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Invert, Always Invert!!!
Assume GOLD prices are going down by 50% in short span of time say in <3 months. Will not this impact share prices of Gold NBFCs? If yes, then reverse also holds true. So directly or indirectly, change in GOLD prices affects valuation of Gold NBFCs. Off course there are many other factors apart from changes in GOLD price in discovery process of share price but that does not mean GOLD price is irrelevant.
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when Gold price goes down chance of npa increases. So price of gold nbfc goes down. But when gold price goes up company is not benefited in direct terms. Only the collateral gold value increase and margin of safety increase.
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Maximum LTV under RBI guidelines is 75%. So if gold price drops by more than 25% in a span of three months, only then chances of NPA increase right? So we cannot simply say whenever gold prices drop chances of NPA are high. They recaliberate their systems every three months to account for changes in gold prices and interest rates. There exists high margin of safety in gold business than we think. Also, gold is emotionally attached to most of the Indian family and these people won’t look at marginal profitability when their sentiments are attached. That’s my view.
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Also see how much of the loan book is rotated every quarter. % of AUM disbursed. New loan book is priced at new gold prices.
10 Yr Price chart of Manappuram
10 Yr Price chart of GOLD
There is seemingly no correlation between price of gold and price of Gold Finance Companies
Stocks price is a slave to earnings and gold price moving up or down doesn’t seem to have much impact on peoples behavior of lending their gold.
Loan is a pull product, ie customers cant be pushed for a loan but will come to the nbfc basis their requirement. Loaning gold in my view would be an underbanked persons last resort. Gold price is not a factor in the customers mind when he enters the nbfc for his need.
Also as @Inimitable_Investor pointed out at there is ample margin of safety. Given that the lender only lends 60% of margin on the gold value. Any new loans disbursed in a quarter where gold falls by 50% will still be only very minimum part of the overall book and still only 10% underwater on the principal lent. Cant get more secure than that in my opinion.
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A better comparison would be interest income on gold loan book vs gold price, rather than stock price, which is subject to several pretty vagaries.
Can someone explain how these gold loan companies/banks give digital gold loans.
Any idea on what really happens from a customer point of view ?
What I understand in Manappuram’s case is that you handover the jewellery at the branch. They keep possession of the gold and whenever you need a gold loan they disburse based on the grammage and other regulations. This amount is directly deposited digitally to one’s bank account. This is one way they conduct business but I am not sure if they charge locker fees for the gold kept idle. Other way could be collection of jewellery at home and immediate disbursement into the customer’s account after evaluating the legitimacy of the gold at the branch. In both these scenarios, customers can make a transaction from home.
Thanks. I was also wondering about locker facility. Of late, likes of SBI have increased the locker amount by as much as 30% on yearly fee. I suspect there will be a fee for holding without taking loans.
Hope someone can answer this…
I kind of track KVB to an extent. They have started the digital gold loan business in last couple of quarters and they have had a stellar Q3 in terms of gold loans (80% growth QoQ - they have relatively low base). So, was wondering how does digital gold loan improve business in such a way.