Bombay: Gold is at an all time high and there is one category that seems to benefit from the gold rally, and that is the gold financiers! Gold is a preferred and safe asset class for most investors in the current uncertain economic scenario.

The two main gold lending players within the NBFC space, Muthoot and Manappuram Finance, have risen more than 2 times from their March lows, indicating market interest that these financiers of the l ‘gold aroused. Of the total market share in the gold lending segment, organized players hold around 35% of the market share while the rest is held by unorganized players.

But with the formalization of the economy, the trend will change in favor of organized actors. However, given the strong pull in the gold lending segment, many new players are entering this segment to meet the growing demand.

Gold financiers have witnessed a surge in the growth of gold lending. Gold financing represents nearly 90% of all loans while for Manappuram, 67% of assets under management constitute gold loans. Both companies reported strong results in the March quarter.

Gold loans are the main option for borrowers in these difficult times and gold is becoming a stimulus tool for many cash-strapped MSMEs to secure their financing needs. Muthoot Finance leadership at T4FY20 had guided gold lending growth of 15-20% for FY21 on the back of increased loan demand.

These companies are able to generate higher profitability in times of economic decline. Declining NPAs, growth in provisioning and the loan portfolio are fueling the profits of the gold financier. In addition, gold financiers do not have to set aside as much money as other NBFCs, resulting in lower provisions that contribute to profitability.

The gold reserve works like insurance against defaults and works like a margin of safety or a cushion. The value of the gold held as collateral is greater than the loan amount and hence the borrowers are reluctant to default on their payments thus ensuring a stable asset quality for the lenders.

KPMG in its report had pegged gold lending growth at around 17% year-on-year for fiscal 21. The two largest gold lending players have yet to report their earnings for the first quarter of the year. FY21, but given the recent rally in gold prices and increased demand for gold lending, we expect them to report strong results this quarter as well.