Microfinance and gold loan companies were once the theme of choice for investors, which helped them raise tons of cash from the public. The theme being played was financial inclusion among India's underpenetrated, large, rural populace. Flush with funds from successful capital raising efforts, these companies reported quarter after quarter of supernormal profits and rapid balance sheet growth. But, soon everything came crashing down like a pack of cards. Adverse regulations in Andhra Pradesh, the erstwhile hub of microfinance in the country put the brakes on growth and sent SKS Microfinance stock hurtling down.
In the case of gold loan financing, however, the Reserve Bank of India (RBI) has been adequately cautious about risks undertaken. It grew uncomfortable with the rapid pace of growth of gold loans when even banks started lending aggressively against the metal.
The central bank came up with a norm for NBFCs that does not allow them to offer a loan above 60% of the value of gold. Plus, it came up with a directive that bank credit to NBFCs for giving loans against gold jewelry will not be treated as priority sector exposure, even if it were given to marginal farmers. Earlier banks would lap up these loans in order to meet their priority sector lending (PSL) guidelines. The new securitisation norms prescribed for banks have almost dried up the bilateral assignment route earlier widely used by gold loan companies. Uncertainties about the business in light of the new regulations have also affected commercial paper (CP) issue by these companies.
In this 1QFY13 Muthoot Finance's sell-down of receivables under bilateral assignments was around Rs 18 bn, a 46% YoY drop. Similarly, Manappuram Finance also saw a 33% YoY drop to around Rs 13 bn. In the 1QFY12, assignments accounted for 14% of Muthoot's liabilities and 13% of Manappuram's, thus it was a vital funding source. Capital funding through commercial paper has been lackluster for two consecutive quarters. Currently gold loan companies are relying more on short and long term bank borrowings. These companies are also expected to issue more non-convertible debentures in order to tide the funding crunch. However, the awareness level about such instruments is low. These companies we will take up more promotional activities for their next such issue, especially in the tier III and IV towns.
Either way, we believe that gold loans are here to stay, and the current pace of growth is more sustainable. Especially since these companies have to now comply with lower LTV (loan to value) ratios, higher capital requirements and limited capital resources.