Impact of COVID on the Gold Finance Industry – 10X10Y

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COVID-19 has been the most unpredictable event there can possibly be. While most businesses have seen adverse impacts of the pandemic, Gold Finance companies have been standing tall throughout.

Mr. V P Nandakumar MD & CEO of Manappuram on May 14th said, “Our past experience is that during periods of economic stress banks can really become risk averse and gold will offer on lending. The global financial crisis in 2008-09 was when major economies went into recession and stock markets crashed. But looking back there was also a period of strong growth for us.’’

I read a few concall transcripts to understand the situation more clearly.

The lockdown was more or less same for all, offices were closed, new customer acquisition came to a halt and collections were affected. However, Manappuram due to the large customer base being online was able to facilitate collections, something Muthoot and IIFL couldn’t totally rely on.

Coming to specific heads, let’s see how the top three listed Gold Loan NBFCs have faired,

Non- Gold Loans

Manappuram and Muthoot both went on record to say that their company is following a cautious approach to the growth of non-gold book with this soft macro environment.

Digitisation

Both Manappuram and Muthoot have increased their focus on digital collections and customer communications. Manappuram was able to increase their online business from 45% pre-covid to 61%.

IIFL launced IIFL Loans App which they said is being increasingly used for various transactions by customers and has been especially beneficial during the lockdown, giving customers ease and convenience of access. They claimed to have about 1,50,000 average monthly active users on the app.

COVID Provisions and Write-Offs

Muthoot has claimed that 90% of their business is on gold loan where they don’t see any dip in yield or loss of capital or interest, et cetera. So, they don’t need any provision for that. But they have still taken an INR 885 crores provision.

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For Manappuram, provisions and write-offs of the stand-alone entity during the quarter were Rs. 36.96 crores, including additional provision of Rs. 14.9 crores due to COVID-19.

IIFL made COVID provisions of close to 82 crores for a total of all their businesses.

Moratorium from Customers/Borrowers

Manappuram had most of it’s gold loan customers prefer to not opt for moratorium as they realize the deferment of payments without the waiver of interest would add to their interest outflow. As far as Muthoot Finance is concerned, they have also not received any request for moratorium from any customer, no borrower has asked for any moratorium. But IIFL on the other end, had 82% if their Gold Loan book under morat.

Moratorium from Lenders/Funders

Muthoot as a company has not asked or requested for any moratorium from any of their lenders, and such is the same for Manappuram Finance.

However, IIFL has requested morat from all of the banks. Almost all the public sector banks have more or less accepted their moratorium on principal but the private sector banks have not accepted moratorium.

LTV

The gold value is going up along with that the LTV is going up.

So currently the average LTV for Manappuram’s customer is only 59% against the regulated cap of 75%. So, customers have used only 59% on an average.

Muthoot Finance was at about 52% to 53% of the LTV.

Branches

Muthoot in May started opening branches. By June mid more than 95% of the staff were coming to the branch and 100% of their branches were also opened. Manappuram also claimed that most of their branches are functional. IIFL had their branches closed for 2 months, but 90% of them are all open now.

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Customer Footfall and Demand- 

MD of Muthoot Finance, George Muthoot said, “Customer footfalls are there, maybe 60%, 70% footfalls are there. We are seeing demand for initially the customers who are coming for paying interest and releasing their gold and only a few customers who are coming for gold loan.

But in the last 3 to 4 weeks, we are seeing more people coming for taking gold loans than releasing the gold loans. So in 2 months of lockdown, there were pent-up demand for people to take back the ornaments that is what we saw in the first 2 weeks of opening the branch. Thereafter, it this becoming business as usual”

MD of Manappuram V P Nandakumar, said, “Today, as we near the end of Phase 3 of the lockdown. Although customer footfalls are still low because public transport is not there”

Chairman of IIFL Nirmal Jain said, “Almost all other branches are open, and we are seeing that the footfall in business is increasing month after month”. He also said, “But if you look at the loan book, it is flat QoQ because many of them are rotational actually, because in case of gold loan, it happens a lot since due to the short tenor people keep paying the loan back and there are new borrowers who take fresh loans. So businesses, except for Mumbai and Delhi, in most other parts of the country, we are seeing that in the month of June and July things are pretty much getting back to normal. I would not call them pre-COVID level, but at least 60%-70% of that level is happening.”

Gold Loan Growth

Muthoot said that they will be able to achieve a growth of 15% plus in the gold loan business this year while Manappuram said that due to COVID they’re expecting a 10% growth in the Gold Loan business. IIFL said that Gold prices are holding up high and as people need working capital to start their businesses or because they were impacted. But I think gold loan outlook is very good. They said that they would see a volume led growth and a value led growth in the future.

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Gold Loan Outlook

All the three players felt a little sting on the demand but were confident on the outlook few months down the line.

Mr. Nandkumar said , “So since the academic seasons have not really started, schools and colleges have not reopened, so that demand is also less. And there other functions are not happening, marriages are not happening. All these are affecting the demand. So when the lockdown is completely lifted across the country, the demands will definitely pickup”

Sumit Bali, CEO of IIFL said, “Gold we have already started seeing activity which is picking up. gold now the LTV is historically low as the gold prices have gone up, so we expect probably after three months sometimes at the end of the three months once situation should be pretty close to normal”

Mr. George Muthoot said, “Some staff who were in some lockdown areas are unable to come, otherwise, the branch business and branch functioning is almost normal. What is lacking is the public transport is not there in many places. That is one of the reasons many customers are not able to come. We are seeing demand for initially the customers who are coming for paying interest and releasing their gold and only a few customers who are coming for gold loan”.

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Moulik Jain
Moulik is 24, an Entrepreneur, and a successful Angel Investor at Beardo (exited). He is currently one of India's youngest Angel Investors.
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