Gold Loan NBFC’s by Antique Stock Broking Limited



The excerpts from the report :

Enduring the twin impact of demonetization & gold price decline

While most sub-sectors within the NBFC space have been hit by demonetization, gold loan NBFCs have an additional battle to fight – the sharp decline in gold prices post the victory of Donald Trump and the possibility of reduction in import duty on gold. Early trends indicate that the impact of demonetization on gold loan NBFCs may be temporary in nature. Gold price decline on the other hand could impact growth, operating leverage and auctions over a slightly longer timeframe. However, we derive comfort from the fact that gold loan NBFCs are much better prepared (compared to 2013- 14) to handle gold price decline and our stress case analysis suggests that they will still be able to deliver RoAs in excess of 3.5% over FY16-19e. The current phase of weakness can be used to accumulate these companies.

Demonetization impact temporary, could gain market share in the long run

Initial reports from our branch visits and management interactions suggest that disbursements (including rollovers) and collections for the month of November stand at ~70% of the predemonetization levels. While some of the shortfall can be explained by cash crunch, some of it is on account of demand destruction due to a section of small businesses coming to a halt. While the current cash crunch and slowdown in small businesses should get normalized by Q4FY17, there could be some material long term gains for gold loan NBFCs. Un-organized gold loan market is three times larger than the organized market. Cash crunch could put a lot of moneylenders out of business and force people to borrow from organized gold loan NBFCs.

De-risking initiatives to ensure milder impact of gold price decline

The tough phase of 2013-15 forced the gold loan NBFCs to de-risk their business models. Introduction of shorter tenured products, timely collection of overdue interest and creation of customer centric culture at the branches has resulted in partial delinking from gold price fluctuation. Now that gold prices in INR terms have declined by ~8% over past few days, these arguments would be put to test over the next few quarters. Sharp decline (>10%) in gold prices impact gold loan companies at three levels – 1) the portfolio de-grows as new loans are re-priced lower, 2) Operating de-leverage sets in due to higher proportion of fixed costs, and 3) customer defaults increase, resulting in interest income losses. Our stress case analysis (gold price at INR2,650 per gram) indicates that gold loan NBFCs would still be able to deliver RoAs in excess of 3.5% over the adjustment period (2.5% in the past down cycle).


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