Gold loan NBFCs unfazed by price volatility post duty cut
Gold loan NBFCs expect the ongoing volatility in gold prices following the import duty cut to have no impact on fresh disbursements or profit margins on existing loans.
On July 23, Finance Minister Nirmala Sitharaman announced a reduction in the import duty on gold from 15% to 6%, effective August 1, triggering a sharp drop in domestic gold prices. As per Indian Bullion and Jewellers Association (IBJA), the price of 24-carat gold, which stood at Rs 73,218 per 10 gram on July 22, plummeted 7-8% days after the Budget.
George Alexander Muthoot, MD of India’s largest gold loan NBFC Muthoot Finance, said although domestic gold prices fell by about 9% after the Budget, they have since recovered strongly, with international prices also rising. “Gold prices have increased significantly over the last few years. While the RBI allows a loan-to-value (LTV) ratio of 75%, our average LTV is only 63%. So, we have substantial margins left,” Muthoot told FE.
The LTV ratio in gold loans refers to the loan amount as a percentage of the gold’s market value. According to RBI guidelines, the LTV ratio is capped at 75%, which means a lender can disburse only up to 75% of the gold’s current market value as the loan.
VP Nandakumar, MD & CEO of Manappuram Finance, said while domestic gold prices are likely to moderate, it will have no direct impact on the company’s business. “An increase in the volume of gold held by households is positive for our business since gold loans are a go-to source for households to meet emergency financial needs,” he said during the Q1 earnings call.
Krishnan R, director and CEO of Unimoni Financial Services, a Kerala-based gold loan provider, however, said if the decline in gold prices continues, it could lead to a drop in the value of collateral, impacting the LTV ratio for NBFCs. To maintain a comfortable risk profile, gold loan companies might be compelled to offer reduced LTVs or push for early closure or partial repayment of loans to keep collateral value within safe limits, he said.
Experts also highlight that customs duty plays only a minor role in determining local gold prices while factors like international gold prices, the rupee-dollar exchange rate and demand-supply dynamics have a greater impact.
In a recent report, Malvika Bhotika, director at Crisil Ratings, said declining gold prices have not materially affected gold-loan NBFCs for two reasons. The LTV range for these NBFCs was low at 60-65% (on a mark-to-market basis) as of June 30, 2024, providing an adequate cushion to manage unfavorable movements in gold prices. NBFCs also focus on periodic interest collection, keeping the LTV under control.
For instance, Manappuram’s LTV ratio as of Q1FY25 stood at 60%, against the regulatory requirement of 75%.
Meanwhile, gold prices are on an upward trajectory. On Tuesday, 24-carat gold was trading at ₹71,369 per 10 gram as per the IBJA, approaching pre-budget levels.
Umesh Mohanan, ED and CEO of Mumbai-based gold loan NBFC Indel Money, said gold prices are likely to rise further due to strong domestic demand with the onset of the festive season. “In the medium term, the yellow metal’s outlook is strong due to a host of issues such as West Asia conflicts, slowdown fears in the US and its likely impact on equity markets and the beginning of a rate-cut cycle by major central banks.”
Source: https://www.financialexpress.com/