The news is Manappuram Finance stock is down 30% in two days. Analysts are saying there are problems due to change in regulations and competition. On 19 March there was an announcement from the company that due correction of gold prices profit may fall. There was also resignation from a director.
Only time a lender will have to bank on the collateral is when he has not lent properly, i.e. he has violated the first principles of lending. The key to good lending is to ensure that the borrower has the ability to generate cash flows to repay debt. Collateral is just incidental; sort of a back-up. However, gold loans (or is it all loans?) in India don't appear to follow this rule.
Only time a lender will have to bank on the collateral is when he has not lent properly, i.e. he has violated the first principles of lending. The key to good lending is to ensure that the borrower has the ability to generate cash flows to repay debt. Collateral is just incidental; sort of a back-up. However, gold loans (or is it all loans?) in India don't appear to follow this rule.
Manappuram is a lender against gold collateral; the promoter-holding is 31.55% and the institutional holding is close to 40%. I am sure these institutions must be tracking this business. The company is worth about Rs.2,000 crores.
As of 31 March 2012 it had debt of Rs.9,300 crores. The loans advanced were about Rs.10,000 crores as of that date. The challenge is recovery of these advances; it is a continuous challenge. Proper risk management holds the key: who you lend; how you lend; how safe are the assets; mechanism of recovery.
The price of gold as of 31 March 2012 was $1,660 t.oz; now it is $1,612 t.oz. During the period the price looked like this:
The highest point was close to $1,800 t.oz and the lowest was below $1,550 t.oz. The swing has been about 14% downward.
Gold holdings of the company as per 2011-12 annual report was 65.57 tonnes (about 2.1 million t.oz) translating to about $3.5 billion (Rs.18,000 crores).
The company is in the business of leverage; debt is high. Nine-month period ended 31 Dec 12 results show that earnings before finance costs were Rs.1,408 crores and finance costs were Rs.891 crores. Clearly there isn't much room to accommodate volatility in lending rates. If gross interest charged to the borrowers goes down it will be a difficult situation for the company.
It appears that average lending rate was about 24% while average borrowing rate was about 14%. The margin of 10% isn't very bad provided that the loans are good, gold prices remain stable and lending rates don't change.
This one is a tough business.
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