Daily Investor's Edge - Digging out the growth in gold financiers

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Welcome to the 22nd edition of Investor's Edge! This issue analyzes the Q1FY26 results and concalls of leading Gold financiers. We will uncover key insights from their quarterly performance, explore what is driving the growth for them, and identify the key growth triggers.

While gold loan businesses are experiencing robust growth, driven by strong demand and favourable regulatory changes, other segments like microfinance (MFI) and unsecured MSME lending continue to face asset quality challenges and higher credit costs.

In general gold financiers do well in the environment of rising gold prices. It's not that people take more gold loans in rising price environments to monetize their assets but also the value of collateral increases thereby reducing the credit cost for the companies.

Companies are strategically recalibrating their portfolios, with a clear trend towards increasing the share of secured gold loans and higher-ticket mortgage loans, while reducing exposure to riskier, unsecured segments

Growth has been strong for Gold lenders across the board

IIFL Finance noted “So, if you really look at the gold loan, which is like almost one-third of our business, and it will grow even faster.” and Also even for the largest player Muthoot Finance reported a “robust 40% year-on-year growth in gold loan of INR 32,272 crores for the full year and a 10% quarter-on-quarter increase of INR 10,238 crores” Also companies like Fed Fina saw gold AUM grow "39% Y-o-Y" to INR 6,332 crores, with tonnage growth of "10% Y-o-Y to 11.2 tons."

Favourable Regulatory Environment: The recent RBI guidelines on gold loans are seen as "quite gold loan business friendly" (Muthoot Finance), providing "more flexibility and actually more product offering to the customer." The LTV (Loan-to-Value) for loans up to INR 2.5 lakhs has been revised from 75% to 85%.

Companies note growing acceptance of gold loans as "a reliable, accessible, and inclusive form of credit" (Muthoot Finance). The industry is seeing "stronger growth... in banks last year and NBFCs also" (IIFL Finance), partly due to "unsecured borrowing opportunities have come down" (Manappuram Finance).

While higher gold prices contribute to AUM growth, some companies like Muthoot Finance noted that customers may tender "a lower amount of gold than what was 6 months back" for the same loan amount due to increased LTV/gold price. Fedbank Financial Services highlighted consistent "tonnage growth" alongside price growth.

There was also an interesting discussion about why LTV comes down when the gold prices come down in Q4FY25 concall of manappuram finance

AUM across industry has been hitting all time high

IIFL Finance says “Our gold loan business has fully bounced back from last year's embargo, reaching an all-time high in AUM. Growth in Aum you for IIFL has been 80%+ this is also due to the fact that last year was lower base given RBI had restricted gold lending for them.

Growth driver for these Nbfcs has been led by Gold”

Fedbank financial services :” On the gold business, we had a good quarter with the AUM growing 39% Y-o-Y and tonnage growing 10% Y-o-Y.”

New regulations are bringing in good tailwinds for the industry

New regulations are welcomed and give more flexibility in offerings with different ticket size Muthoot - “It gives more flexibility and actually more product offering to the customer in the new regulation. And up to INR2.5 lakhs, the LTV has been revised from 75% to 85%. So any company who wants to give even up to 85%, there is flexibility. That is what I said, it gives more flexibility and we can give more products to the customer also. And for your information, 85% of customers are below INR2.5 lakhs. “

New regulations gives level playing field with unorganised lenders in smaller ticket size Manapurram “So the smaller ticket size that is below INR1 lakhs, there because of the regulatory changes like transferring money into bank, etcetera, etcetera, is showing some negativity there and these small borrowers borrowing up to INR10,000, INR20,000, INR50,000, there is a tendency for going to the unorganized sector borrowers, money lenders. But more and more customers are coming from the higher ticket size. So now with the new regulation concerning gold loan, it has definitely created a level playing field. There are opportunities there. And of course, there's opportunities for borrowing the unsecured loans. That is coming down, which actually is positive for gold loans.”

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Gold loan becoming strategic priority

Fedbank Financial services prioritises "twin strategy focusing on gold and LAP business" and plans to "expand gold business through branch expansion and increased doorstep coverage," aiming to open "over 100 new markets this financial year." Whereas Manappuram also highlighted that, “We proposed to increase the gold loan portfolio at a consolidated level of 75% of total loan portfolio in a phased manner.”

Also companies like CSB bank also noted “we will continue to do well in gold as long as we can”

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Asset quality improvement

In this quarter muthoot experienced 700 crores worth of NPAs reversing

“It is not that we engage people to go and collect our money, etcetera. It is people coming forward. They wanted their gold back, they came forward. We gave them time to clear the loan. So what -- what was our NPA was just because we had given these customers time to redeem their gold instead of auctioning it. So in quick time -- some time, they came back, they took back their gold. So because of that, they were able to save the gold. That is what we see in this. It is not that we don't need to do any recovery measures, etcetera. The customer who has not been able to pay during the loan period. We just gave him more time so that he has given opportunity to take it back, and he used this opportunity. Let us not see more than that this is somebody whom we had to go and collect it or he is not -- because this gold is here. He will come and collect it, take back the gold from us. So that is why he has come.”

– Manappuram

Falling cost of funds which should improvise further as liability gets repriced Manapurram

“So on the cost of borrowing, what you said is exactly what we have seen in the banking system. So we are slowly seeing banks are reducing the MCLR, which is beneficial. But at the same time, the mix of borrowing, we are trying to have -- or the banks also want to have long-term facilities. So the short-term mix is coming down. It is only 26% you see. Working capital demand on CP is around 4%, etcetera. So in the coming quarters, we can see the reduction in the MCLR rates, which will benefit us. And I think with the capital coming in, all those things, we can see a better negotiation with the banks.”

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Robust expansion plans to spread out the foot print

Increasing focus to utilise tailwinds via faster branch expansion Fedbank financial services  :

“But this year, we plan to put up upwards of 100 branches. And if you remember, we had said that first, we will do the experiment of co-locating the MSE branches with the gold, and we were focused on getting that correct in this quarter. We've identified premises for gold branches So we have successfully merged and co-located 23 branches. That is 23 branches of our ST LAP business have moved into 23 gold branch premises.  . Q2, you will see substantial opening of gold loan branches, and we will continue to expand our network through gold branches. So those branches will be put in context of FY '26 and FY '27 growth.”

Increasing hiring for the new leg of branch expansion Fedbank financial services

“See, as Parvez articulated in his opening remarks, we are building up for capacity expansion, and we are recruiting people for these new branches. We will not fall short of capitalizing on the gold loan opportunity. So many of the people will start coming on board from Q2. So you will see the muscle getting built up here”

Manappuram waiting for RBI approval to expand branch footprint beyond 1000 stores - “ For gold loan companies, there is a restriction in opening branches beyond 1,000. The restriction is we need to seek prior approval from RBI for every branch. We have submitted application for opening branches, and we hope to get it soon”

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Peer to Peer comparison

Conclusion

In conclusion, the gold finance sector is experiencing a period of significant growth and positive transformation. Favorable regulatory changes, increasing acceptance of gold loans as a reliable form of credit, and strategic shifts by companies towards secured lending are all contributing factors. Gold financiers are prioritizing this segment, expanding their branch networks, and enhancing their capacity to capitalize on these tailwinds.

The robust performance in Q1FY26 by leading players like Muthoot Finance, IIFL Finance, and Fedbank Financial Services, coupled with improving asset quality and falling costs of funds, paints a promising picture for the industry's future.

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Disclaimer: This blog post is intended for informational purposes only and does not constitute financial advice or a recommendation to buy or sell any securities. Readers should conduct their own research and consult with a qualified financial advisor before making any investment decisions.

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