INDIAN GOLD LOAN FINANCING INDUSTRY:
Gold loan is one of the safest asset classes in comparison to other products available for retail lending. The tenure of the loan typically stays between 9 months to 1 year. Small businesses (SME, MSMEs) generally avail of gold loans to finance their short-term working capital needs.
Typical gold loan features for a specialized gold financier:
• Payment type: Bullet payment (incentives for regular payments to reduce probable default amount)
• Documents required: Any Govt. ID
• Prepayment penalty: No (while traditional banks charges 1-3% penalty)
• Yield: 20-22% (yield for traditional banks: 8-10%)
Advantage over other forms of financing:
• Less competition from banks given the niche expertise required
• Low asset quality risk due to the 75% LTV cap and highly liquid collateral
• Strong ALM position with short loan tenures
• Low balance sheet leverage
• High margins and negligible credit costs; hence very high ROA (6.5% - 8.5%) & ROE (23%-28%)
• Three specialized Gold Financiers – Muthoot Finance, Manappuram Finance and Muthoot Fincorp account for 75%+ of the NBFC pie in the gold loan segment
Digitalization of Gold Loans:
Disruptions by the new generation fintechs in India have forced the traditional gold lenders to incorporate digitalization into their business models. In the past few years, both groups, especially Manappuram Finance, ramped up its online gold loan business. For these transactions, the customer needs to visit the branch only once, when depositing the gold. After that, all transactions can occur online.
Traditionally, the Indian gold financing business is largely dominated by the informal segment, which accounts for almost 65% of gold loans. Within the formal financing space, specialized gold NBFCs have been gaining market share from banks. This is due to certain advantages on turn around time, repayment flexibility, documentation flexibility, etc.
Key Players & Stock Performance:
• Muthoot Finance
o ROA – 6.4%
o ROE – 27.8%
o 5-year Sales CAGR – 18%
o 5-year Profit CAGR – 32%
o 5-year Stock Price CAGR – 35%
• Manappuram Finance
o ROA – 5.9%
o ROE – 26.5%
o 5-year Sales CAGR – 22%
o 5-year Profit CAGR – 37%
o 5-year Stock Price CAGR – 15%
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