George Alexander Muthoot, Managing Director of Muthoot Finance, India's largest gold loan focused non-banking finance company (NBFC), is a happy man.
The fourth quarter numbers of Muthoot Finance shows why gold loan business is different from other NBFC businesses in a crisis period. This is one of the few NBFC business segments least affected in a slowing economy and amidst the Covid-19 crisis.
Also, analysts believe this is among the few businesses expected to weather the Covid-19 storm.
In the January-March quarter, Muthoot Finance posted a 52.4 percent jump in consolidated net profit at Rs 835.78 crore due to higher demand for gold loans. Muthoot is clear what worked in his company's favour.
"The NBFC sector was generally facing a funding crunch in Q4. This made access to finance difficult for many borrowers. However, we continued to meet the demand. Also, for a customer seeking emergency funds, gold loans are a preferred option due to competitive processing time," Muthoot told Moneycontrol in an exclusive interaction.
The numbers corroborate his views. Muthoot Finance's total income during March quarter of FY20 rose to Rs 2,633.58 crore from Rs 2,088.84 crore in the year-ago period while the interest income grew to Rs 2,562.96 crore, up from Rs 2,017.81 crore a year ago.
For fiscal year 2019-20, the company reported a 51 percent jump in consolidated net profit at Rs 3,168.68 crore as against Rs 2,102.96 crore in 2018-19. Income for the year increased to Rs 9,683.98 crore from Rs 7,594.43 crore in the previous fiscal.
Despite adverse environment, demand for gold loans remained high in the fourth quarter. On the asset quality front too, gold loan NBFCs such as Muthoot are better positioned due to the comfort of having gold as collateral. For Muthoot in Q4, asset quality remained strong with gross-stage 3 assets declining to sub-2.2 percent (2.5 percent in Q3FY20).
Gold loans are emergency loans for average Indian consumer. In the past, there used to be a social stigma attached to pledging gold for money or selling gold ornaments to meet the financial requirements. This has changed in recent years.
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"Over the next 12 months, the company is likely to benefit from (a) sharp run-up in gold prices, and (b) higher gold loan demand due to the impact of the lockdown on customers. Thus, we increase our EPS estimates by 8-12 percent,”" said Motilal Oswal Institutional Equities in a report.
But many NBFCs operating in microlending business, real estate finance and auto loans aren't as lucky as gold loan providers like Muthoot. These firms are fighting liquidity constraints and demand shortage. In a crisis period, consumers typically cut down spending or hold plans on auto, housing, travel and so on.
But gold loans have a different purpose. This is an emergency loan. In fact, in times of a crisis like the ongoing pandemic, the demand for emergency loans goes up as people generally suffer from loss of income due to job losses. The loss of income during the Covid-19 crisis could actually generate more demand for emergency loans, analysts feel.
Muthoot expects a gradual recovery in business from the lockdown period by Q2 and expects demand for gold loan to continue.
"As businesses restart after the lockdown period, there will be demand for fresh funds and gold loan business will continue to benefit from this demand," Muthoot said.
The company has resumed normal operations in most of the branches, except the branches closed by the company in Kerala, he said.
Though gold lenders like Muthoot are less likely to get affected on asset quality and demand due to their nature of business, one needs to wait and watch how the situation evolves as the actual economic impact of the Covid-19 outbreak remains uncertain.Follow our coverage of the coronavirus crisis here