Why High Gold Prices May Have Pushed Muthoot Finance Shares To New High

Soon after the coronavirus outbreak worldwide was declared a pandemic, stock markets across the world crashed. These sharp corrections caused investors to seek refuge in safe haven assets like gold and the US dollar-a double whammy for Indian buyers of the yellow metal.

As international prices for the metal rose and the rupee weakened, gold prices in India touched new all-time highs and never really subdued.

Gold futures on MCX, the Indian exchange for commodities, closed at Rs 47,334 per 10 grams on 12 June, despite the correction in prices this week.

Gold and Muthoot Finance

In the current scenario, where most banks and finance lenders are being downgraded for a possible increase in bad loans, Muthoot Finance shares hit an all-time high of Rs 998 this week. And, what's setting it apart from other lenders amid the pandemic induced economic crisis could be its strong reputation for gold loans.

The Kerala-based finance company has also been expanding operations in north India, harvesting the potential of gold sitting idle in Indian households.

'Gold loan is Good' says Muthoot Finance's latest ad campaign with Amitabh Bachchan as the brand ambassador, aiming to encourage first time loan seekers to opt for gold loans as aggressive pushes to widen the category among its financial products.

COVID-19 induced economic crisis spurs demand for gold loans

Gold finance businesses like Muthoot Finance are benefiting from a combination of cash crunch among people/MSMEs and banks' aversion from risky assets.

Traditional lenders outside the gold segment like banks, mortgage lenders, and other NBFCs are staring in the face of uncertainty with regard to repayments. Cheaper lending rates, 6-month moratorium and an increase in deposits have hurt interest income. As these institutions become reluctant in to lend to new customers and small businesses, Muthoot Finance gains customers for gold loans.

These loans are especially beneficial to small traders and businesses as well as fresh time borrowers with no credit history that find hard to get loans in commercial banking establishments. Gold loans are quick to be disbursed as these are secured by collateral, that is, gold stored by the customers with the finance company.

Higher gold prices also mean that one will get a better value for their jewellery or biscuits and gold is perhaps the most valuable asset class at the moment, amid the dim economic outlook.

Further, the gold financier is protected for any possible major price fluctuation as they maintain a loan-to-value ratio (LTV) of 75 percent on the loan amount.

Rural areas and smaller towns reopen for business

An estimated 22,000-25,000 tonnes of gold sit idle as assets in Indian households, according to the World Gold Council. Of this, 65 percent stock can be found in rural India alone, giving lenders of all kind an oppurtunity to unlock the potential of gold loans as rural areas and smaller towns are reopening sooner than urban areas amid the COVID-pandemic.

Inclusion in Nifty Next 50 and Nifty 100

As part of its semi-annual review, NSE's Index Management Sub-Committee announced that it will be adding Muthoot Finance Ltd to Nifty Next 50 and Nifty 100, with effect from 26 June 2020.

The gold finance company 11 percent increase in net profit for the financial year 2019-20 at Rs 1,972 crore with loan assets growing 18 percent year-on-year to Rs 34,246 crore.