A sharp drop in gold prices is likely to impact gold loan financiers such as Muthoot Finance and Manappuram Finance. The price of gold has fallen 20 percent from its highs in August 2020 and has fallen 11 percent so far this month.
The correction in gold prices is mainly led by rising government bond yields, a strengthening dollar and heavy outflows from gold ETFs. Analysts believe this correction could be headwinds for gold loan financiers in the short term.
When gold prices fall, the LTV on gold loans increases. A healthy correction in the price of gold can result in lending firms asking borrowers to pledge more gold.
“Since gold is used as collateral, any major price change will have an impact on the loan-to-value ratio (LTV) of gold loan financiers. Since gold loan maturities are relatively shorter, we assume these financiers are fairly well protected,” said Lalitabh Shrivastawa , AVP – Research, Sharekhan.
However, Shrivastawa believes that falling gold prices would be sentimentally negative for the holdings of gold loan financiers as it affects the LTV and creditworthiness of borrowers.
“Gold lending is an attractive business, and falling gold prices within a reasonable range are unlikely to have a material impact on gold financiers’ business. In the short term, however, this would be viewed as sentimentally negative,” added Shrivastawa.
Meanwhile, analysts remain bullish on the gold price as they expect the yellow metal to rally over the long term.
“We expect the price of gold to remain sideways in the short term as the vaccination campaign gains momentum around the world, which will lead to a full normalization of economic activity. Expecting inflation to rise due to excess liquidity around the world can help gold prices in the medium to long term, ”said Nish Bhatt, Founder and CEO of Millwood Kane International.
However, experts believe that falling gold prices could hit the businesses of these NBFCs, but the general economic recovery will cushion the impact as these loans are low risk.
Business is increasing, which is a sign of economic growth. These gold loan financiers focus on small loans with low NPA levels.
On Friday, Manappuram Finance’s shares fell 4.27 percent to close at Rs 166.90 apiece, while Muthoot Finance shares ended 1.57 percent lower at Rs 1,294.20 apiece on the BSE.