Gold Curbs Help Muthoot Contain Bad Debt Surge: Corporate India

Muthoot Finance Branch
Pedestrians walk past a Muthoot Finance Ltd. branch in Mumbai. Photographer: Dhiraj Singh/Bloomberg

Gold’s recovery from a two-year low in India is providing relief to finance companies that are struggling with record bad loans spurred by a decline in the value of their collateral.

Delinquent debt at Muthoot Finance Ltd., India’s biggest provider of gold-backed credit by market value, will drop from a record in the three months ending Sept. 30, said Managing Director George Alexander Muthoot. Indian gold futures surged to an all-time high last month after the rupee’s plunge forced the government to raise taxes to curb imports of the metal by the world’s biggest consumer.

Bullion’s about 24 percent recovery from a two-year low in June will help lure borrowers to Muthoot and Manappuram Finance Ltd. as a cash squeeze prompts commercial lenders to raise interest rates. Bad loans at the two companies surged last quarter as the monetary authority tightened rules, and as investors lost faith in the precious metal as a haven, driving down prices and prompting debtors to default.

“Recoveries will become easier as gold prices surge,” Muthoot said in an interview. “Value of the collateral going up always helps in the lending business. Concerns raised regarding the business is allayed.”

Manappuram said in a March stock exchange filing, declining gold prices may trigger an increase in defaults and an “under-recovery of revenue on certain gold loan portfolios.” The company’s gross bad debt rose 21 percent in the three months ended June 30 from a year earlier.

Import Taxes

India, which imports almost all its bullion, raised duties on gold three times to 10 percent this year to moderate consumption that has contributed to the rupee’s 13.9 percent slide and an unprecedented current-account deficit. India accounted for about 20 percent of global gold demand last year according to data from the World Gold Council.

The rupee slumped about 8 percent in August, its biggest monthly decline since 1992 and touched a record low of 68.8450 per dollar on Aug. 28. The currency rose 0.9 percent at 4:50 p.m. in Mumbai.

The Reserve Bank of India in July raised two interest rates to curb the currency’s slide. Three-month interbank money rates surged 338 basis points from July 15 to 11.59 percent after the central bank’s move.

Rising borrowing costs and precious metal prices may add to Muthoot’s customers. The company, which has 6 million clients, says it adds 80,000 new borrowers everyday. The company has 4,163 branches, according to a presentation on the Kochi, India-based Muthoot’s website. ICICI Bank Ltd., India’s second-largest lender, had 3,350 offices in the nation as of June 30.

Local Taxes

Gold contract for delivery in October surged to a record 35,074 rupees per 10 grams on the Multi Commodity Exchange on Aug. 28 and was at 30,509 rupees at 4:35 Mumbai. Rupee-based gold prices have gained about 1 percent this year, compared with a 18 percent drop in the metal priced in dollars.

Bullion prices in India are much higher than international rates after adding the various taxes and local premium, said Haresh Soni, chairman of the All India Gems & Jewelery Trade Federation, which represents 300,000 jewelers and bullion dealers across the country.

An increase in the value of the metal helped pull Muthoot’s shares up 51 percent from a record low in August. They rose 0.1 percent to 124 rupees in Mumbai. Manappuram, which has declined 48 percent this year, rose 3 percent to 17.45 rupees.

RBI Order

“There would be better numbers going ahead in the fiscal third and fourth quarters,” said Laxmi Ahuja, an analyst at Marwadi Share & Finance Ltd. The companies will get better value for the collateral incase they are forced to sell as prices are much higher now, she said.

Bad debt at Muthoot, which has more than 254 billion rupees of loans backed by 137 tons of gold, rose to 5.38 billion rupees as of June 30 from 2.99 billion rupees a year earlier, according to exchange filings.

Manappuram, based in the south Indian city of Thrissur, on Aug. 9 said its soured debt rose to 1.37 billion rupees as of June 30 from a year earlier. It’s lent 91.6 billion rupees backed by more than 50.3 tons of gold.

India’s central bank in March 2012 ordered the industry to cap loans at 60 percent of the value of their gold collateral. Before the rule, Manappuram was lending as much as 90 percent of the value of its gold holdings, according to a Feb. 8 note by Ambit Capital.

‘Stronger Position’

Manappuram “readjusted the loan to value ratio to a very conservative level almost three months back,” Chief Executive Officer V.P. Nandakumar said by phone. “The rally in gold prices puts us in a stronger position when it comes to asset quality.”

High leverage at gold lenders is a cause of concern, a Reserve Bank of India panel headed by K.U.B. Rao said in February. The panel recommended gold lenders’ activities be closely monitored through frequent collection and analysis of relevant financial data.

Muthoot and Manappuram’s current risk buffers exceed the 10 percent required by central bank rules and there is no need to raise capital, said Munish Dayal, a partner at Baring Private Equity Partners India Ltd., a private-equity fund, that holds a stake in both companies.

Muthoot has a Tier 1 capital ratio of 14.3 percent and Manappuram has a ratio of 22.54 percent as of June 30, exchange filings show.

“The concern that remains for the gold loan companies is on the regulatory front,” said Dayal. “The business model is sound, entry barriers are high and demand for these loans remains strong.”

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