Articles

Manappuram Paves its Way through Crisis

By: Medhavi Rana

It is rightly said that the night is darkest before dawn and there is reason for hope as well. As all the companies around the world are bearing the brunt of coronavirus, NBFCs have been amongst the badly hit as post corona also they were gripped in liquidity crunch. However a closer look at this sector presents some light at the end of the tunnel through NBFCs like Manappuram who are operating in business of Gold loans.


The World Gold Council expects gold to become a tool for revival of many small and medium enterprise businesses and households. Reasons being:
– During stressful times banks are risk aversive and cut down their lending patterns, as a result the fall-back option for borrowers left is gold loans.
-Moreover, two third of India’s gold lies with people in rural and semi urban areas. As unemployment is on an increase and people are struggling to make ends meet, the most plausible alternative is to pledge gold and get a loan to pave the way through this crisis
– Globally gold prices have risen over 18% in 2020. The surge in gold prices is attributed to investors for whom gold acts as safe havens. It is excellent medium of exchange a solid store of value.

Growth Drivers for Gold Loan.

Exclusion from mainstream personal and retail loans by scheduled banks –
Traditional banking products are not easily available to rural and semi urban areas. For example, a farmer may not easily get a loan from the bank because his creditworthiness depends on the harvest, he produces which is volatile based on external factors like monsoon. In such a situation flexibility and easy accessibility of gold loans boosts popularity of gold loans.
– Economic Correlation shows that 1% increase in income boosts gold demand by 1%.
– 45% of the gold market is present in North and West India but have minimal credit penetration which opens the door for expanding gold loan services.

– Lower default rates are generally seen in disbursement of gold loans. It generally ranges between 1 -3%.

Business Model of Manappuram


Gold loans is one of the oldest forms of secured lending, gold pawning has been prevalent in India for centuries. Given the liquidity it offers, gold helps both the borrowers and lenders to complete transactions faster than all other forms of lending. Traditionally known as hyper local retail business, India’s gold market has started attracting large investors since last decade.


This is what has helped the NBFC sector to emerge as a strong player and
Manaapuram’s business model is based on a simple methodology. They take your gold and disburse loans. There isn’t much of paperwork that needs to be done and 70% of their business can be attributed to gold loans.

Manappuram provides the customers option of re-pledging the gold- It means that if you have borrowed money 3 months ago and in the present you are expected to pay full amount then you can close the existing account by borrowing the money through re-pledging gold and pay back the new loan in coming 3 months.
Manappuram has been in gold loan business for past 60 years. The company has a strong brand reputation and reputation plays a crucial role in financing because customer is provided with a sense of security.
Hence all these factors play a crucial role in strengthening their business model and make them different from other strategic players in the market.

What crisis means for Manappuram

-During this crisis due to increase in gold prices value of collateral explodes,
customers can pledge gold and get higher loan amount due to which for many small businesses it has become a life saver.
-Proportion of total gold loan portfolio stands at 63% which show an increase from 48% in March.
-Gold loans are small ticket items which means person gets usually small amount for short period of time. However, the interest rates offered by banks on gold loans range 10-15%, Manappuram charges 20-25% but then also people are more interested in buying gold loans from NBFC because interest payable on short time period usually does not makes much difference. People are willing to give a few bucks more to get added convenience of NBFCs.
-However the collateral backing of loan is extremely risky because if the prices of gold falls in future then Loan to Value ratio will increase tremendously. This was the situation encountered by them in 2013 -14 when prices of gold fell dramatically and they had to auction the pledged jewellery at discounted rates.

Conclusion


Though they have been sailing smoothly in this crisis however they must be cautious and be wary because if a tide comes which disrupts gold prices then chances of drowning are huge. If need be, they should learn from their past mistakes. More diligence is required especially at this time because biases and consumer sentiments play a major role.

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