Soaring Manappuram Finance gold loan auctions a sign of economic distress

MUMBAI: Manappuram Finance Ltd reported a 5.6% sequential contraction in its gold loan portfolio for the March quarter, sharper than analysts had estimated as the company ended up auctioning an amount huge 404 crore of gold to collect money.

For the lender, the contraction of the loan portfolio can be a problem, as the demand for gold loans is unlikely to decline, especially during a pandemic. Management said the portfolio’s contraction was largely due to the surge in auction amounts. Thus, on an annual basis, the lender’s bridgepayday.com website gold loan portfolio has grown by 12%.

Analysts believe that for Manappuram Finance, the good growth of its non-gold portfolio bodes well. The lender reported 18% growth in consolidated net profit and decent sequential performance on the microfinance portfolio. “Over the medium term, we expect MGFL to experience steady-state gold lending growth of 10-15%. In the other segments, there is a clear turnaround in terms of growth and recovery, ”wrote analysts from Motilal Oswal Financial Services Ltd in a note.

But a larger question is whether the surge in auctions beyond a surge in gold lending during a pandemic is a sign of growing distress among Indians. Lenders end up auctioning quarterly, but the surge in the amount is cause for concern. While Manappuram had auctioned Rs404 crore in the March quarter, it had only auctioned Rs8 crore of gold in the first nine months of FY21.

Gold is a popular asset used as leverage for working capital among those involved in agriculture and related activities. It is also a key asset for the leverage used by small businesses for capital investment. Gold is also used for emergency lending in times of crisis, as it is the most liquid physical asset. This is the third use of gold which is a sign of increasing stress, especially during the current pandemic.

The acceleration in the growth of gold loan portfolios of lenders, including large banks such as the State Bank of India (SBI) during the pandemic, may mean that emergency use is increasing. Bank gold lending was up 81% in FY21. For some lenders like the Federal Bank, the gold loan portfolio was the engine of overall lending growth. As such, small businesses are unlikely to engage in capital investments, as the prospects for future income are bleak. Ergo, the demand for gold loans was largely made up for working capital and emergency purposes.

The second wave of the pandemic may have compounded the distress, and Manappuram management appeared cautious about its impact on the performance of the gold loan portfolio. What should add to the concern is that the lender had to auction gold even at the lowest prices during the quarter. Recall that gold prices had fallen by more than 10% during this period. Even so, auctioning the collateral would be the last option. The fact that Manappuram had to use the latter option despite a sharp drop in the value of collateral is another sign of distress among borrowers.

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