At a time when the country is reeling from the impact of the global outbreak of coronavirus (COVID-19), Non-Banking Financial Companies (NBFCs) stocks were among the worst hit. Their performance is expected to be hit due to stress across sectors. While these concerns are justified, gold finance companies - Manappuram finance and Muthoot finance - may be less impacted.
There is no doubt that both financiers have also faced operational disruption due to lockdown; they have shut their branches. There could be some asset quality pressure as well. However, the highly liquid collateral (gold)- backed loans with typical asset tenure of fewer than 12 months and pricing power should augur well.
The safety of money is most important in the current situation when the degree of impact of COVID-19 is very difficult to ascertain. Nobody is able to estimate how long it will last. Thus gold finance companies are a better and safer choice among NBFCs.
The short tenure of assets and reasonable liquidity position as stated by the Reserve Bank of India's announcement on liquidity push is also comforting and should help address any asset-liability mismatch.
Traders, shopkeepers, and small businessmen will be the biggest takers of gold loans to restart their operations after the lockdown, according to leading gold Non-Banking Financial Companies (NBFCs). Gold loans for business purposes are mostly used by small businesses as a short term working capital for stocking.
Gold prices hovering around 55,645 per 10 grams, small businesses will take loans to resume operations. They will take gold loans for bridge financing to restart their operations. Due to the lockdown, payments have not come to small businesses, shopkeepers, and traders. So they will need money, for which they will pledge gold to avail gold loans. Nearly 75% of customers are small businessmen, shopkeepers, and traders.
In this time of crisis there banks providing instant gold loans that too at low Gold loan interest rates as low as Rs. 1000 per lac to 15% per annum. We can conclude that gold loans are much of a life saviour in this time of crisis.
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