As Sima Taparia would say, the stars are aligning perfectly for Muthoot and Manappuram shareholders
- The RBI is looking to beef up its gold reserves, and this may come as good news for shareholders of India’s largest gold lenders Muthoot Finance and Manappuram finance.
- The share price of the private lenders Muthoot Finance and Manappuram Finance also reflected the same optimism as both the companies’ shares have rallied over 9% and 2% in the past one week.
- According to Amit Jain from Ashika Wealth Advisors, “the increasing gold prices will be an advantage for the gold lenders as the collateral gets strong and they are more secure.”
- Check out the latest news and updates on Business Insider.
AdvertisementGold prices are soaring, the Reserve Bank of India is pushing for more cash in the system to increase lending, the government’s partial credit guarantee scheme has offered additional comfort, and to top it all up, there are reports that the Indian central bank may add more yellow metal to its reserves and that could lead another rally in gold prices.
If Sima Taparia, the famed matchmaker from Mumbai who hit stardom with Netflix’s Indian Matchmaking, were to describe the situation, she would say “the stars are aligned perfectly” for Muthoot Finance and Manappuram Finance, two companies whose primary business is to lend against gold mortgaged with them.
The two companies give out 70% of all the gold loans in the country. “Movement in the gold price has a direct impact on gold lender business, an increase in gold prices improves the value of collateral thereby reducing the LTV ratio and possibility of principal loss,” Jaikishan Parmar, Sr. Equity Research Analyst, Angel Broking told Business Insider. LTV stands for loan-to-value.
How rising gold prices help Muthoot and Manappuram?
When someone borrows money against gold, he/she is giving jewellery (mostly) as collateral. If the market price of that jewellery goes up, it is good for the lender because the collateral would be worth a lot more in case the loan is defaulted.
Assume the borrower wants to borrow more, he doesn’t need fresh collateral. The rising price of gold will allow him to get more loans for the same jewellery he had mortgaged in the first place.
Gold prices have gone up 32% in 2020 so far, and that means for every ounce that Muthoot and Manappuram lent against is worth that much more i.e. better buffer and room to lend more resulting in higher revenue.
“We were lending up 75%. But, people used to think that our average people borrowing is only about 65-68% like nobody takes 75% fully. In the last 6 months, the price of gold has gone up so much, the people who are having the gold can borrow much more. And, at today’s price, they have borrowed only 50%. So even out of that 75%, that 25% is still there for them to borrow,” George Alexander Muthoot explained in a recent conversation with Business Insider.
Investors, mutual funds are cashing in on these hopes
The share price of the private lenders Muthoot Finance and Manappuram Finance also reflected the same optimism as both the companies’ shares have rallied over 9% and 2% in the past one week.
According to Amit Jain from Ashika Wealth Advisors, “the increasing gold prices will be an advantage for the gold lenders as the collateral gets strong and they are more secure.”
Both Muthoot and Manappuram are a play on the robust rally in gold prices. The second largest mutual fund house in India by assets, HDFC AMC recently added Muthoot Finance to its portfolio in July.
Why gold prices may rise further?
Gold prices rise whenever there is a chance of a crisis or inflation. Between the pandemic and rising geopolitical tension in the South China Sea, a continuing trade war between US and China, there are enough reasons for a rally in gold prices.
There is another way in which gold prices may rise, if the dollar weakens. When the currency weakens, you need more cash to buy the same amount of gold. The uncertainty around the US election has cast a shadow of doubt on the greenback.
Given these rising risk factors, global central banks have been hoarding gold. The RBI too is likely to do the same as India faces an added threat of high inflation in the coming months. All of these may prop up gold prices, which are already trading at over ₹55,700 an ounce in India, even more.
And as explained above, it bodes well for Muthoot and Manappuram.
But that’s not all. The two companies are benefiting from additional government measures— meant for the pandemic— as well. Muthoot Fincorp has raised ₹1,475 crore under the partial credit guarantee scheme and RBI's special liquidity measures in the past four months, PTI reported on August 18.
Therefore, the business growth for these two companies has been vastly better than the country’s overall credit growth that stood at a measly 5.5% at the end of July.
*Data: As of July end except for Manappuram, which is as of June-end
|Growth in gold loans
|Overall bank credit growth
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