Intense competition may shrink margins of gold loan firms, says S&P

Manappuram, Muthoot not facing refinancing challenge yet

Rating agency Standard & Poor’s (S&P) on Monday said intense competition in the gold loan business in India may shrink margins of gold finance companies. However, the market leaders in this segment — Manappuram Finance and Muthoot Finance — are not facing any refinancing challenges yet.

Intense competition in certain relatively safe asset classes will also likely strain the earnings of finance companies. For example, lending backed with gold collateral in India generates strong risk-adjusted margins, bringing in many competitors.

The rating agency said short-term borrowings expose non-banking financial institutions to swings in sentiment.

Some finance companies rely on short-term borrowings, which exposes them to refinancing risk and to market volatility.

Among rated finance companies, it assesses the funding of Muthoot Finance and Manappuram Finance as moderate, largely due to refinancing risk. About one-third of both firms’ liabilities are short term.

S&P said a handful of mitigating factors should hold the entities in good stead. They have positive asset-liability management as a large portion of their assets are short-term gold loans. These are of a short tenor (of up to one year), are self-liquidating, and are a constant source of liquidity.

They have high levels of equity capital, at a tad over one-quarter of their total liabilities, and ample liquid assets, about 5-10 per cent of total assets, it added.

While the risk premiums are set to rise in the Asia-Pacific region, non-banking finance entities with strong profile and parentage, especially in India, Japan, and Taiwan, will see only measured rise, said the agency.

Most Asia-Pacific finance companies have benefited from excess liquidity in the past few years, and financing costs have dropped sharply for some. With external turbulence, this liquidity situation could reverse.

Risk premiums for weaker finance companies or those with perceived governance issues will rise more sharply, observed S&P.