At a Mumbai branch of gold loan provider Manappuram Finance,customer walk-ins 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.
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 $1,321 an ounce.
Manappuram Finance and Muthoot Finance Ltd two of Indias 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 doesnt make sense to pay up the outstanding dues, said 41-year-old Tamanna Gowda,who pawned his wifes gold bangles to draw a loan of Rs 60,000 when the yellow metal was hovering above $1,790 an ounce.
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.
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 contacted by Reuters 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 its business model.
At Muthoot,loans that were 90 days or more past due more than doubled to over 7 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. Banks and finance firms,which have small gold-loan portfolios,are also raising collateral demand at their branches,executives said.
We have to be prepared for further drops, K Venkatraman,CEO 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. Most analysts rate Muthoot and Manappuram as a buy or strong buy,according to Thomson Reuters data. Morgan Stanley Investment Management,Reliance Capital and Goldman Sachs Asset Management were among investors in either of these companies at the end of last month,according to fund tracker Value Research.
But,as gold started tumbling this week,nervous investors bailed out of both firms. Muthoot shares fell to their lowest in nearly a year and rival Manappurams shares hit a new low.