For listed gold loan providers Muthoot Finance Ltd and Manappuram Finance Ltd, high prices of the yellow metal and moderating competitive pressures have acted as catalysts. While Muthoot Finance has seen its stock rally 28% in the last three months, Manappuran has been slow, with a modest 4% increase.
In fiscal year 2024 (FY24), Muthoot’s gold loan business saw an 18% year-on-year increase in assets under management (AUM), surpassing its 15% target. For FY25, it has maintained the 15% growth guidance. Manappuram, on the other hand, reported a 9% growth in gold loan AUM in FY24 and expects better performance in FY25.
Recall that both the companies were seen as beneficiaries of the interim ban on peer IIFL Finance Ltd in March by the Reserve Bank of India (RBI). Plus, the intense competition from banks and other non-banking financial companies (NBFCs) that marked the pandemic era is easing.
As such, in Q4FY24, on an aggregate basis, banks’ gold loan portfolios saw 15% growth compared with 19-26% reported in the previous four quarters, according to a Kotak Institutional Equities report.
Management from both Muthoot and Manappuram have downplayed concerns about the RBI’s cap on cash disbursements in gold loans at ₹20,000, indicating no significant impact on their operations. They have seen robust gold loan growth even in April and May.
Margins and competition
Rising gold prices typically boost demand for gold loans, albeit with a lag, signalling a positive outlook for these lenders. However, margins need close monitoring.
Muthoot’s net interest margin (NIM) improved sequentially, driven by higher yields. The cost of borrowing is anticipated to rise to 9% from the current 8.55%. The management has expressed confidence in managing a 25-30 basis point increase in borrowing costs, potentially passing this on to customers. This stance marks a shift from Q3FY24 when the management suggested they would not increase rates despite rising costs. Ambit Capital attributes this optimism to reduced competitive intensity, especially with the larger IIFL out of the market.
Conversely, Manappuram’s NIM fell sequentially, hurt by the rise in cost of borrowing. Manappuram has a relatively higher share of non-gold loans in its portfolio and deterioration in asset quality is another concern. A particular pain point is that its subsidiary Asirvad MFI has continued to report asset quality deterioration and high credit costs. While exposure to non-gold segments has aided consolidated AUM growth of about 19% year-on-year in FY24, a Motilal Oswal Financial Services report has warned that rapid expansion in these areas could bring associated asset quality risks if not managed well.
To be sure, both companies have been diversifying to beat the cyclicality of the gold lending business. For Muthoot, the share of non-gold assets in consolidated AUM increased to 16% in Q4FY24 from 13% a year ago. This share is expected to be at 18-20% of the total assets over the next three-five years.
Despite the current rally in gold prices, Muthoot, relatively better placed, needs to monitor asset quality in its microfinance subsidiary, Belstar, closely. Further, the management expects traction in the vehicle finance segment to be muted due to its competitive nature and Muthoot’s limited presence in this market.
Among other things, branch expansion remains a significant growth driver for Muthoot, especially following its recent share price rally. The company opened 115 branches in FY24 and plans to add another 150-200 in FY25, a critical part of its customer acquisition strategy to drive further gold loan growth.
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