Bank funding to gold loan companies gets costlier
The cost of bank funding to the thriving gold loan segment has increased by 150-200 basis points following the Reserve Bank of India decision to remove the priority sector lending benefit available to commercial banks, under the agriculture classification, for loans to (and assignment portfolios from) gold loan companies like Manappuram and Muthoot.
The removal of the priority sector benefit will marginally diminish the attractiveness for banks to lend to this sector. This will lead to an increase in the gold loan players’ borrowing costs by 150 to 200 basis points, and reduce growth rates in their portfolios to less than 50 % annually, over the medium term.
“The increase in the cost of funds is likely to be passed on to customers by gold loan companies. The explosive growth of the gold loan segment will also come down following the RBI measure,” said a banking source.
Till recently, most of the bank loans and assignment transactions of gold loan companies qualified for the priority sector lending benefit. Therefore, these entities have tended to rely heavily on bank funding — loans from, and portfolio assignments to, banks constituted nearly 75 % of these entities’ aggregate borrowings as on September 30, 2010. The priority sector lending benefit has also helped gold loan companies maintain a low cost of borrowings from banks, at 8.0 to 10.5 %.
The credit risk profiles of the gold loan players will, nevertheless, continue to be supported by their stable asset quality, comfortable capitalisation, and established track record
“We believe that the removal of the PSL benefit, together with hardening interest rates, will lead to an increase in the cost of bank funding for gold loan players. These entities will try to access funds from capital markets more frequently to mitigate the impact of this increase,” said Rupali Shanker, Head — CRISIL Ratings.
It estimated the overall cost of borrowing for its rated gold loan entities to increase by 150 to 200 bps over the medium term. “Despite the expected increase in cost of borrowing, gold loan companies’ profitability will remain strong, driven by high yields, improvement in operating efficiencies, and low credit costs.” The net profitability margin of these companies is expected to remain comfortable between 4 and 5 %, despite declining from the 5 to 7 % levels reported in 2009-10.
“We expect cost of funds to increase by 100 bps which will lead to 40 bps moderation in the margins of Manappuram (MGFL). Due to the rise in cost of funds, we have revised our EPS and ABV estimates by 6 % and 1 % downwards respectively. Going forward, the assignment route will be less attractive for NBFCs such as MGFL, which will spur its cost of funds,” said a note by Enam Research.
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