Fading glitter: Icra downgrades outlook on Muthoot & Manappuram to negative

Says adverse changes in operating environment cast a shadow on asset quality, earnings and financial flexibility

Rating agency Icra on Thursday downgraded its outlook on two major gold loan companies, Muthoot Finance and Manappuram Finance, from ‘stable’ to ‘negative’. It said adverse changes in the operating environment cast a shadow on the asset quality, earnings and financial flexibility of these firms.

“While a recent correction in gold prices has led to a significant increase in the proportion of higher loan-to-value loans in the overall portfolio in less than a month, delays in auctioning have caused a significant build-up in delinquencies,” the rating agency said.

For Muthoot Finance, the 90-plus day delinquencies have increased to 7.29 per cent as on March 20 from 3.01 per cent at end-March 2012.

Manappuram Finance has also witnessed an increase in 90-plus day delinquencies that rose to 9.43 per cent at end-March 2013 from 2.44 per cent a year earlier.

The rating agency expects delinquencies to rise further, as the borrowers’ equity in the collateral has dropped after the correction in gold prices.

“This may well increase the borrowers’ propensity to default. Thus, any further decline in gold prices could add to the pressures on asset quality,” it said. After dropping Rs 3,160 in three consecutive sessions, gold prices yesterday declined further to Rs 26,350 per 10 gram, lowest since August 2011. According to industry players, the correction was on account of sustained selling by stockists against restricted buying.

Icra said the increase in delinquencies might necessitate more auctions, which in turn may lead to under-recovery of interest. But, if auctions are completed in a timely manner, it could prevent credit costs from expanding substantially, the rating agency added.

“Given the recent developments, Icra would continue close monitoring of gold loan companies’ earnings and its delinquency levels. The company’s ability to conclude auctions of vulnerable accounts without inviting regulatory intervention would also be watched. Further, Icra would closely monitor the impact of emerging developments on financial flexibility of gold loan companies,” it said.

At 3:25 pm, shares of Muthoot Finance were trading at Rs 119.40 on the National Stock Exchange, down 0.9 per cent from previous close. Manappuram Finance shares were at Rs 16.10, up 4.9 per cent over yesterday’s close.