Indian gold lenders cut tenor, watch prices fall

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Indian companies that lend against gold are cutting the tenors and looking for more collateral to protect against falling precious metal prices.

The market leader, Muthoot Finance Ltd., offers interest rate discounts and other incentives to borrowers who choose to repay monthly or more frequently. Rival Muthoottu Mini Financiers Ltd. has been lending mainly for 90 days compared to 270 days previously, and most large companies are paying amounts well below regulatory limits, which were 75% of the metal’s value for shadow lenders and 90% for traditional banks until March 31.

Gold loans had exploded over the past year as small businesses tried to get their hands on lockdowns by promising family jewelry that is a staple of almost every Indian household. Muthoot Finance, for example, saw these loans increase by 25% over the period and the company owns 146 tons of gold, higher than the official reserves of Singapore and Sweden.

“People are sentimental about their jewelry,” said George Muthoot Alexander, Managing Director of Muthoot Finance. “They will never want to default despite a drop in gold prices because they intend to get their promised adornments back.”

Gold posted its first quarterly decline in more than two years amid improving expectations for the global economy and weaker demand for exchange-traded funds. The metal fell more than 9% in 2021 as investors trade their havens for assets that will benefit from the economic recovery. Prices in India are trading near their lowest for a year.

The biggest worry, however, is that a new wave of infections in India could derail business plans and force even the most diligent repayers to default.

“We review our portfolio and mark-to-market levels on a daily basis to see if further steps are needed,” said Mathew Muthoottu, Managing Director of Muthoottu Mini Financiers.

What Bloomberg Intelligence Says:

Assets under management of Muthoot Finance and Mannapuram Finance could decline by 1.5% -2% from January to March due to the sharp drop in gold prices. But their low loan-to-value ratios could protect asset quality, and gold loan assets under management could rebound after a gradual economic recovery despite fierce competition in the segment from banks.

– Rena Kwok, credit analyst

India’s gold lending market will grow by at least 34% to 4.6 trillion rupees ($ 61 billion) in the two years to March 2022, according to a estimate by KPMG. The segment’s bad debt rate is around 1% compared to 7.5% for the whole banking sector.

“Although there is a fall in the price of gold and among the normal risk parameters, security would have decreased, the economy is opening up and it is not a crisis situation,” said the director. General of World Gold Council India, PR Somasundaram. “People are eager to take loans because all the businesses are coming back and small businesses depend on gold loans for quick access to capital.”

(Update prices in the fifth paragraph)

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