Operational efficiencies may offset fall in NIMs, as gold loans lose priority tag.
Manappuram General Finance and Leasing is literally sitting on a gold mine. In a country where personal lending from the banks is not enough to meet the credit needs of individuals, the business of giving loan against gold is probably the safest business to be in. Therefore, analysts believe, there is enough room for growth. Manappuram, India’s second-largest gold loan provider with a loan book of Rs 7,000 crore, has a competitive advantage in the gold financing market, believe analysts.
While Reserve Bank of India’s (RBI) recent clarification, which removed gold loans from the priority sector, is likely to impact the loan book and net interest margins. The company has adequate sources of funding its loan book at a cumulative aggregate growth rate of 38 per cent in FY11-13. Undoubtedly, RBI guidelines will impact the availability of funding to an extent, analysts do not see funding drying up for Manappuram. In the third quarter, almost 45 per cent of the company’s debt funding came from the non-priority sector route (bank credit lines, CPs, NCDs).
According to analysts, even within priority sector borrowings, 35 per cent was from selling loan portfolios to banks, a source of credit which could possibly dry up. Manappuram’s remaining 65 per cent were credit lines from banks at slightly lower rates due to the priority sector tag. Due to change in regulation, analysts tracking the stock believe, NIMs may compress by 260 basis points between FY11 and FY12.
An Ambit Capital report says, “whilst loan book growth seems likely to slow down from its historical rate (120 per cent compound annual growth rate between FY07-11), we still expect it to be healthy at 38 per cent CAGR over the next two years driven by increased business from the branches that were opened in the last one year (52 per cent of the branches) and a further roll out of 1,000 branches over the next two years.” However, analysts believe, there are fears that the interest rates charged by gold lenders like Mannapuram could be capped. In such a scenario, profitability could well suffer. Also if there is a sharp fall in gold prices, then the company could see loan defaults.