An Indian lender has seen its shares surge during the coronavirus pandemic, during a stark contrast with peers during a nation battling mounting bad loans. Its secret sauce: Taking gold as collateral. Muthoot Finance Ltd., India’s largest cash-for-gold lender by assets, has soared 41% this year, beating all but two on the 103-member S&P BSE Finance Index. All 14 analysts tracking the stock still recommend buying or holding on thereto, data compiled by Bloomberg show. Indian households, among the world’s biggest hoarders of the commodity, are pawning gold ornaments with lenders like Muthoot to bridge over a cash crunch because the pandemic led to job losses and a credit crunch.
The long-standing practice has proved a win-win for all involved as gold prices surged to a record.
“This is kind of a season of gold loans,” Ashutosh Khajuria, the chief treasurer at Federal Bank Ltd., also offers the loans. “Whenever there are uncertainties about business cycles, gold loans grow the fastest, and therefore the current momentum is probably going to last a minimum of till the top of this fiscal year .”
With a transaction time of but an hour and collateral that will be quickly sold off within the event of default, India’s marketplace for such lending is about to expand by at least one-third to 4.6 trillion rupees ($61 billion) in two years to March 2022, according to an estimate by KPMG. Lenders themselves usually face little difficulties in rolling over funds used for lending against gold as quite half these loans get repaid in but six months.
While bank loans might not grow in the least this year, Muthoot’s Chief treasurer Oommen K Mammen forecasts 15% growth from lending against gold to the likes of farmers, truck owners, and agri-traders. The firm’s gross gold-loan assets stood at 416 billion rupees against the collateral of 176 tonnes of the metal as of March 31, filings show.
Still, S&P Global Ratings maintains a negative outlook on Muthoot in a shrinking economy in which it’s difficult for some lenders to roll over short-term debt or raise funds.
Shares of Muthoot can gain another 11% within subsequent 12 months, according to a consensus of analyst estimates compiled by Bloomberg.
Gold doubles up as a policy and a pension plan in India that lacks robust welfare systems. DCB Bank Ltd., another lender that gives financing backed by the metal, saw it’s gold loan disbursals surge in May and June, said Praveen Kutty, its head of retail and SME banking.