The steep fall in gold prices has prompted rating agency ICRA to downgrade the outlook on the long term ratings of gold finance companies Manappuram Finance and Muthoot Finance from stable to negative.
The steep fall in gold prices has prompted rating agency ICRA to downgrade the outlook on the long term ratings of gold finance companies Manappuram Finance and Muthoot Finance from stable to negative. Both stocks have been hammered in the last four sessions, as investors are worried that borrowers may default on the loans because of the decline in gold prices.
Following are the reasons cited by ICRA for the downgrade:
1. Adverse changes in the operating environment, which are likely to impact the asset quality, earnings and financial flexibility of gold loan companies after recent fall.
2. Delays in gold auctioning have caused a significant build-up in delinquencies - where a borrower is late or overdue on repayment of the original loan amount and interest. Muthoot's 90+ day delinquencies have increased from 3.01 percent as on March 31, 2012 to 7.29 percent as on March 20, 2013. Manappuram's 90+ day delinquencies have shot up from 2.44 percent to 9.43 percent in the same period.
3. ICRA says delinquencies could rise even further going forward, given that borrowers’ gold value of the collateral has dropped after significant fall in gold prices, and this may well increase borrowers’ tendency to default.
4. Higher delinquencies may trigger more gold auctions, which in turn may lead to under recovery of interest. However, credit costs may not increase substantially if the auctions are completed in a timely manner.
5. The extent of dilution in yields and earnings would depend on company’s ability to maintain collections, especially from high Loan-To-Value (LTV) accounts. Loan-To-Value means the amount of loan sanctioned on the value of gold at the time of loan sanction. Higher loan to value ratios mean higher risk for the lender.