Gold loan firms in a tizzy as borrowers prefer to default
Mumbai: At a Mumbai branch of gold loan provider Manappuram Finance Ltd, customer walkins have halved in the past week. At another, customers are rushing in to release their pledged gold, expecting further falls in the price of the metal, which would force the lender to sell it.
Officials at these branches are scrambling to contact customers asking them to pay their dues and, in some cases, top up their collateral after the value of gold tumbled to a more than two-year trough to around Rs 25,000 per 10 gms.
Manappuram Finance and Muthoot Finance Ltd, two of India’s biggest gold pawn companies — now face the risk of a slowdown in their business and, worse, rising bad loans because some borrowers may choose to default and not redeem pledged gold that is now worth less than when the loans were made. “I had taken a loan about a year back for an emergency. Now, it doesn’t make sense to pay up the outstanding dues,” said 41year-old Tamanna Gowda, who pawned his wife’s gold bangles to draw a loan of Rs 60,000 when the yellow metal was hovering above Rs 33,000 per 10 gms.
India is the biggest importer of gold in the world. Jewellery made of the metal is an essential part of the dowry Indian parents give to their daughters at weddings. Just two months back, customers got about Rs 2,300 for each gram of gold pledged with pawn shops. Now, the value has fallen to about Rs 1,800.
The concerns that there could be many more potential defaulters like Gowda have made investors jittery and prompted ratings agency ICRA to lower its outlook on Manappuram and Muthoot to “negative” from “stable”. Analysts expect 18-20 per cent of gold loan firms’ books to be under pressure as the metal skids.
Manappuram has warned that defaulting borrowers would force it to report a quarterly loss, but Muthoot remains optimistic and does not expect the slump to affect business.
“Considering our longterm relationships, the concerns over wilful defaults seems far-fetched. There is a genuine demand for gold loans and we continue to stay optimistic about our growth prospects,” the official of the gold loan firm said.
At Muthoot, loans that were 90 days or more past due more than doubled to over seven per cent of its total book at the end of March from a year earlier. At Manappuram the figure ballooned to 9.4 from 2.4 per cent over the same period, according to ICRA.
Indian banks and other finance companies, which have small gold-loan portfolios, are also raising collateral demand at their branches, senior bank executives said. “We have to be prepared for further drops,” K. Venkatraman, the chief executive officer of private sector lender Karur Vysya Bank, said. Gold loans account for a quarter of its total assets.
“We may ask some customers to make part-payments where margins are very low. We have issued circulars to our branches that if there is need they can go after specific customers,” Venkatraman said.
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